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Alteration of Share Capital - Coggle Diagram
Alteration of Share Capital
S.617 sets out the ways which the can be done
Increasing capital by allowing new shares
Sub-dividing shares (eg converting 100 £2 shares into 200 £1 shares)
Consolidating shares (eg converting 100 £10 shares into 10 £100 shares)
These alterations do not adversely affect the creditors and concerns regarding capital maintenance do not arise
A reductio in the company's share capital can adversely affect the creditors position and so speicif rules exist regarding such reductions that aim to protect the company's creditors
Reduction of share capital
CA2006 provides for 2 methods
Special resolution followed by court confirmation
Available to public and private companies
The company must pass a special resolution resolving to reduce its share capital, if the resolution passes, the company can apply to the court for an order confirming the reduction
The primary concern of the courts is the interests of the company's creditors
A reduction will only be confirmed if the creditors of the company are safeguarded so that money cannot be applied in any way that would be detrimental to crediors
As a reduction can adversely affect the position of the company's creditors, CA2006 provides every creditor with the right to object to a reduction if the following conditions are met
The proposed reduction involves a diminution of liability in respect of unpaid share share capital or the payment to a shareholder of any paid up share capital
The creditor can show that there is real likelihood that the reduction would result in the company being unable to discharge his debt or claim when it fell due
`The court will draw up a list of such creditors and will confirm the reduction unless it is satisfied that every creditor on that list has either
Consented to the reduction
Their claim or debt has been discharged has determined r has been secured
If the court confirms the reduction, the company must deliver to CH a copy of the court order and a statement of capital and the Registrar will register it. The reduction will take effect once these documents have been registered
Special resolution followed by solvency statement
Only available to private companies
Involves the company passing a special resolution supported by a solvency statement
The solvency statement must not be more than 15 days before the date of the resolution
The solvency statement is a statement that each of the directors has formed the opinion that
As regards the company situation at the date of the statement, there are no grounds on which the company could then be found to be unable to pay (or otherwise discharge) its debts
The company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date of the statement
If it is intended to commence the winding up of the company within 12 months of the date of the statement, each director must be of the opinion that the company will be able to pay its debts in full within 12 months of the commencement of the winding up
The statement is only valid if made by all the directors, if the directors make a solvency statement without having reasonable grounds for the opinions expressed in it and the statement is delivered to the registrar, then an offence is committed by each director in default and the reduction will be void
Within 15 days of the resolution being passed, the Company must deliver to CH a statement of capital and copies of the resolution and the solvency statement
As long as the processes are followed, a company may reduce its share capital in any way it chooses, subject to 2 limitations
A company that seeks to reduce its capital by special resolution supported by solvency statement cannot do so if the result of the reduction is that there would be no members of the company holding shares other than redeemable shares
A company may not reduce its share capital by either method if the reduction is part of a scheme under which a person is to acquire all the shares in the company or all the shares in one or more classes other than those they already hold
A company does not require authorisation from its articles in order to reduce its share capital but the articles may exclude or restrictive company's ability to reduce its share capital
Acquisition of own shares
S.658 of CA2006 establishes a general rule that a company cannot acquire its own shares with contravention of s.658 being a criminal offence, there are several justifications for this
Such an acquisition would return capital to the shareholders which is prohibited under the capital maintenance rules
A company could purchase its own shares in an attempt to manipulate its own share price
Such an acquit ion would reduce the company's share capital and could allow a company to avoid the procedures for reducing share capital
Number of exceptions to the prohibition
A limited company may acquire any of its own fully paid shares otherwise than for valuable consideration
A company may acquire its own shares as part of a valid reduction of capital
The court may order that a company purchase its own shares from a member if the members interests have been unfairly prejudiced under s.994 of CA2006
Redeemable shares
Redeemable shares are shares issued by the company on the condition that they will be redeemed by the company if the company or shareholder so requires
A public company may only issue redeemable shares if authorised to do so by its articles
A private company does not need authorisation from its articles but its articles may exclude or restrict the company's ability to issue redeemable shares
Only fully paid up shares can be redeemed and the company must pay for the shares upon redemption unless the company and the shareholder agree to payment being made on a later date
In order to prevent capital being returned to the shareholders, the payment for the shares must come from company's distributable profits or from the proceeds of a fresh issue of shares
When redeemable shares are redeemed, they are cancelled and the company share capital must be reduced by he nominal value of the shares redeemed
If the shares were redeemed wholly out of the company's profits, the amount by which the company's issued share capital was diminished must be transferred to an account called the capital redemption reserve
Within one month of the redemption, the company must notify CH of the redemption, specify the shares redeemed and provide a statement of capital
Purchase of own shares
S.690 provides the company with a more wide-ranging ability to purchase its shares as it applies to all shares, but it is subject to several limitations
The company's articles may exclude or restrict the company's ability to purchase its own shares
A company cannot purchase its own shares if as a result of the purchase there would no longer be any shares other than redeemable shares or shares held as treasury shares
Only fully paid shares can be purchased
Authorisation
The purchase of shares must be authorised with the process different depending on whether the purchase is a market purchase or an off market purchase
Market purchase
One that takes place on a recognised investment exchange and is subject to a marketing arrangement on the exchange
A company that purchased its own listed hares would constitute a market purchase
A company can only make a market purchase of its own shares if it is first authorised to do so by resolution of the company
Off Market purchase
One that does not take place on a recognised investment exchange or does take place on a recongised investment exchange but is not subject to a marketing arrangement on the exchnage
Before making an off market purchase, the company must first obtain approval
The terms of the contract for the share purchase must be authorised by a resolution of the cmpany before the contract is entered into
The contract must provide that no shares may be purchased until its terms have been authorised by a resolution
Payment and cancellation
The shares must be paid for on purchase unless an private company is purchasing shares for the purposes of or pursuant to an employee share scheme
The purchase of shares must generally be paid for out of the company's distributable profits or out of the proceeds of a fresh issue of shares made for the purpose of financing the purchase
A process for purchasing shares out of capital is available to a private company if
The purchase is authorised by the company's articles and
The total price paid for the shares does not exceed £15,000 or the nominal value of 5% of its fully paid up share capital at the beginning of the year, whichever is lower
Once purchased, the shares are cancelled and the company's share capital must be reduced by the nominal value of the shares cancelled
If the shares were purchased wholly out of the company's profits, the amount must be transferred to the capital redemption reserve
Within 28 days, the company must deliver a return to CH which states the number and nominal value of the shares purchased and the date which they were delivered to the company
Acqusiition out of capital
CA2006 allows private companies to redeem or purchase their own shares out of capital providing that the company has first used any available profits and the proceeds of any fresh issue of shares made
Any member (other than one who voted for the resolution) or creditor of the company may within 5 weeks of the resolution apply to the court for an order cancelling the resolution
Process
Directors Statement: specifying how much capital will be required and make a statement of solvency
Auditors report: states the amount specified is properly determined and he is not aware of anything to indicate the opinion in the solvency certificate is unreasonable
Special resolution: within one week of the directors statement, the payment out of capital must be approved by a special resolution
Public notice: within one week following the resolution being passed, the company must publish a notice in the Gazette
The payment out of capital must be made no earlier than 5 weeks after the resolution and no later than 7 weeks