Company Law — Capital and Financing

Allotment is the process by which new shares are created and allocated to persons. Existing shares can be transferred from one person to another (no new shares are created).

Directors' authority to allot (s.549-551):

• Directors of a company with more than one class of shares may not allot shares unless authorised by the articles or by ordinary resolution (s.551)
• Directors of a company with only one class of shares may allot shares of that class without specific authorisation (s.550) — unless the articles restrict this
• The authorisation must state the maximum number of shares that may be allotted and the expiry date of the authority (maximum 5 years, renewable by further ordinary resolution)

Statutory pre-emption rights (s.561):

• When a company proposes to allot ordinary shares for cash, those shares must first be offered to existing shareholders in proportion to their existing holdings (a "rights issue")
• This protects existing shareholders from dilution of their percentage ownership
• Pre-emption rights apply only to ordinary shares allotted for cash — they do not apply to: bonus issues, allotment for non-cash consideration (e.g., shares issued as consideration for an acquisition), or shares held under an employee share scheme
• Pre-emption rights can be disapplied by special resolution (s.570-571) — either generally or for a specific allotment. This allows the directors to issue shares without first offering them to existing shareholders (e.g., to a new investor or in a placing). Institutional shareholders monitor disapplication carefully.

General rule: Shares must not be allotted at a discount to their nominal (par) value (s.580). A share with a nominal value of £1 cannot be issued for less than £1. It can be issued at a premium (e.g., £1 nominal for £3.50 — the £2.50 premium goes to the share premium account).

Forms of payment:

• Cash: The most common form of payment
• Non-cash consideration: Shares can be issued in exchange for property, assets, services, or other non-cash consideration (e.g., shares issued as consideration for acquiring another company)

Additional rules for PUBLIC companies:

• Shares must not be allotted unless paid up to at least one-quarter of the nominal value plus the whole of any premium (s.586). Private companies have no minimum payment requirement.
• Non-cash consideration must be independently valued (s.593) — a report by an independent expert (usually an accountant) confirming that the consideration is worth at least the nominal value plus premium. This prevents shares being issued for overvalued consideration. Private companies do not require independent valuation.
• Shares must not be allotted for future services or undertakings (s.585) — the consideration must be received or receivable, not contingent on future performance. Private companies have no such restriction.

Partly paid shares: Shares may be issued as partly paid — the shareholder pays part of the nominal value upfront and the remainder is callable by the company at a later date. The unpaid portion represents the shareholder's maximum liability to the company's creditors.

A company may issue different classes of shares with different rights. The rights attaching to each class are defined in the articles.

Ordinary shares:

• The most common type. Carry voting rights (typically one vote per share), right to dividends (variable, at the board's discretion), and residual claim on assets in a winding up (after all creditors and preference shareholders are paid)
• Bear the highest risk (last to be paid) but have the greatest potential for reward (unlimited upside through dividends and capital growth)

Preference shares:

• Carry a fixed dividend (e.g., 6% of nominal value), paid in priority to ordinary dividends
• Priority over ordinary shareholders on return of capital in winding up (but after all creditors)
• Usually carry no voting rights (or limited rights only when dividends are in arrears)
• May be cumulative (unpaid dividends accumulate and must be paid before ordinary dividends) or non-cumulative (unpaid dividends are lost)
• May be participating (share in surplus profits beyond the fixed dividend) or non-participating
• May be redeemable (the company can buy them back) — note IAS 32 classification as financial liabilities if mandatory redemption

Other types: Deferred/founders' shares (dividend paid only after ordinary shareholders receive a specified amount), non-voting shares, redeemable shares, convertible shares (can be converted to a different class).

Variation of class rights (s.630): The rights attached to a class of shares can only be varied with the consent of the holders of at least 75% in nominal value of the issued shares of that class (or by special resolution of a separate class meeting). Holders of at least 15% of the shares in that class who did not consent may apply to the court to cancel the variation within 21 days (s.633).

A debenture is a document that acknowledges a debt or obligation of the company. It may or may not be secured by a charge over the company's assets. The term is used loosely to cover any form of written acknowledgement of indebtedness — including loan stock, bonds, and loan notes.

• Debenture holders are creditors, not members — they have no ownership interest or voting rights
• Interest on debentures is a deductible expense for corporation tax (unlike dividends, which are paid from after-tax profits)
• Interest must be paid regardless of whether the company makes a profit (unlike dividends, which are discretionary)
• In a winding up, debenture holders rank ahead of shareholders (and if secured, may rank ahead of unsecured creditors too)

Security given by a company to a lender typically takes the form of a charge over the company's assets. There are two types:

The distinction depends on the degree of control the charge holder has over the assets. If the company is free to deal with the assets without the charge holder's consent, the charge is floating — regardless of how it is labelled in the documentation (Re Yorkshire Woolcombers Association [1903]; Agnew v Commissioner of Inland Revenue [2001]).

Crystallisation is the process by which a floating charge becomes a fixed charge — it "crystallises" or attaches to the specific assets held by the company at that moment. After crystallisation, the company can no longer deal with the charged assets freely.

Events triggering crystallisation:

• Commencement of winding up (liquidation)
• Appointment of an administrator or administrative receiver
• The company ceases to carry on business
• An event specified in the charge document (e.g., failure to maintain a specified asset level, breach of a covenant)
• Notice from the charge holder requiring crystallisation (if the charge document permits — an automatic crystallisation clause)

Registration (s.859A-859Q CA 2006):

• A charge created by a company must be registered at Companies House within 21 days of creation
• Failure to register makes the charge void against a liquidator, administrator, and other creditors — the debt becomes unsecured. The charge remains valid between the company and the charge holder, but it loses its priority status.
• The charge is registered by filing the prescribed particulars and a certified copy of the charge document. Companies House issues a certificate of registration, which is conclusive evidence that registration requirements have been met.
• The company must also maintain its own register of charges (s.876)

Priority of charges:

When multiple charges exist over the same assets, priority determines which charge holder is paid first:

• Fixed charges rank before floating charges — even if the floating charge was created first
• Among charges of the same type, priority is determined by the date of creation (not registration) — the earlier charge has priority
• A negative pledge clause in a floating charge agreement prohibits the company from creating any fixed charge that would rank ahead of the floating charge. This does not prevent the fixed charge from being valid, but the company may be in breach of its agreement with the floating charge holder — potentially triggering crystallisation.

A company may reduce its share capital by special resolution using one of two procedures:

1. Court-confirmed reduction (s.645-649):

• Available to all companies (private and public)
• The company passes a special resolution and applies to the court for confirmation
• The court must be satisfied that creditors' interests are adequately protected (creditors may object to the reduction)
• The court may require the company to settle or secure creditors' claims before approving the reduction

2. Solvency statement procedure (s.641-644):

• Available to private companies only
• The directors make a solvency statement — a statutory declaration that the company can pay its debts as they fall due for the next 12 months (or, if the company is to be wound up within 12 months, that it can pay its debts in full)
• No court confirmation is needed — this is a simpler and cheaper procedure
• Making a solvency statement without reasonable grounds is a criminal offence

Common reasons for reducing capital: Eliminating accumulated losses from the balance sheet (debit balance on retained earnings), returning excess capital to shareholders, reducing the nominal value of shares.

A company may purchase its own shares (a "share buyback") subject to conditions (s.690-708). This can be useful for: returning cash to shareholders, increasing earnings per share, facilitating the exit of a shareholder (e.g., in a private company), or employee share schemes.

Key rules:

• Must be authorised by the articles
• The shares must be fully paid
• The company must not purchase all of its shares — at least some shares must remain in issue
• Payment must normally come from distributable profits or the proceeds of a new share issue made for the purpose
• If funded from distributable profits, the nominal value of the shares purchased must be transferred to a capital redemption reserve (CRR) — maintaining the capital base
• Private companies only: May use the permissible capital payment (PCP) procedure (s.709-723) — funding the purchase partly or wholly from capital if distributable profits and proceeds of new shares are insufficient. Requires a directors' solvency statement, special resolution, and a notice in the Gazette inviting creditors to object.

Purchased shares are cancelled (unless held as treasury shares by a listed company — treasury shares can be resold later).

Redemption of redeemable shares follows similar rules — the terms of redemption are set when the shares are issued. Redeemable shares can only be issued if the company also has non-redeemable shares.

Financial assistance occurs when a company provides financial help (loans, guarantees, security, gifts, indemnities) for the purpose of enabling someone to acquire shares in the company (or its parent company).

The rule (s.678-680 CA 2006):

• Public companies: It is generally prohibited for a public company to give financial assistance (directly or indirectly) for the acquisition of its own shares or shares in its holding company. This is to prevent the company's assets being used to fund a takeover at the expense of creditors.
• Private companies: The prohibition on financial assistance was abolished for private companies by CA 2006 (s.682). Private companies can now give financial assistance for the acquisition of their own shares, provided the directors act in accordance with their general duties (particularly s.172 — promoting the success of the company).

Exceptions (available to public companies):

• Where the company's principal purpose in giving the assistance is not to give it for the purpose of the acquisition (or the assistance is incidental to some larger purpose and given in good faith in the interests of the company) — s.678(2)
• Lawful distributions (dividends), allotment of bonus shares, reductions of capital, redemption/purchase of own shares
• Lending money in the ordinary course of business (e.g., a bank lending to a customer to buy shares in the bank)
• Employee share schemes