BAAF2 Corporation Law Coursework 2010
Tutor: Jerry Defreitas
Course: BAAF2 Corporate Law
DeadlineDate: 16/12/2010
Student Name: Sarah
Introduction and Background
Southend Fashion Designs Ltd
Lorraine, Brenda and Pam wish to transfer their existing business to a company so that they could obtain the benefit of limited liability. The company is to be called “Southend Fashion Designs Ltd.”They instruct their solicitor, Michelle, to prepare the necessary documentation. The company is to have an issued share capital of 5000 £1 shares. Lorraine, Brenda and Pam will each hold 1000 10% preference shares, and Jade and Ivor will each hold 1000 ordinary shares. All the shares are to be fully paid up. The directors are to be Lorraine and Brenda.
On 4th September 2010, Lorraine hears that Compute Ltd. is selling computers cheaply and she signs a contract to purchase one on behalf of her company. She signs the contract in the following way:“Lorraine, agent of Southend Fashion Designs Ltd.”
In early September 2010, Southend Fashion Designs Ltd. receives its certificate of incorporation. The Registrar issues the certificate on 11th September 2010, but in error inserted 11the November as the date of the certificate.
Lorraine and Brenda hold a board meeting at which they ratify the contract with Compute Ltd. Shortly afterwards Compute Ltd telephone Lorraine to say that the computer that she ordered is now only available with a double disc drive and not a single disc drive as agreed. There is a small increase in the cost but nevertheless Lorrain agrees to this and signs a letter approving the alteration.
Michelle and Compute Ltd have not been paid.
Company Name:
Southend Fashion Designs Ltd
5000 shares@￡1=5000
1000 10%Preference Sharess@￡1
1000 Ordinary sharess@￡1
The company can freely change its name by passing a special resolution or by any other means provided by its articles and by altering its constitution to reflect the change.
Company can buy its own shares,and shares in Lorraine and Brenda must be fully paid up.Company must have issued shares which are non-redeemable shares.Company must obtain its shareholders' permission before it can buy back the shares,Private purchases-special resolution to give permission.
According to the case,the company should obey the pre-incorporation contracts.The general rule is that the company cannot be sued on a pre-incorporation contracts;not even if the company purported to ratify the contracts.
(a) Advise Michelle and Compute Ltd.
On 20th December 2010, Southend Fashion Designs Ltd. receives a letter from the Companies Registrar informing its directors that they should change the company's name.
As Lorraine signs the contract in the following way:“Lorraine, agent of Southend Fashion Designs Ltd.” ,the department for Business,Enterprise and Regulatory Reform(BERR)can also compel the company to change its name to be “Southend Fashion Designs Ltd.” ,but its power to do so is statutorily regulated,depending on the reason for requesting the name change.
Since the Ltd's name is the same or is too similar to that of an existing company,BEER can force the new company to change its name within one year of incorporation.
A company can change its name by:
· special resolution; or
· by means provided for in the company’s articles;
If you change the company’s name by special resolution you must file a copy of the resolution and form NM01. The NM01 must include the appropriate fee.
COMPANIES ACT 2006
SPECIAL RESOLUTION ON CHANGE OF NAME
Company number: _________________________________________
Existing company name: ___________________________________________
At an Annual General Meeting* / General meeting* (*delete as appropriate)
of the members of the above named company, duly convened and held at:
On the ____________ day of ___________ 20______
That the name of the company be changed to:
New name:
Signed: _______________________________
*Director / secretary / CIC Manager (if appropriate) / administrator / administrative receiver / receiver manager / receiver, on behalf of the company.
(*delete as appropriate)
Notes:
This form is for use by PLC’s or private companies who choose to hold Annual General Meetings or general meetings for the purpose of a special resolution.
A copy of the resolution must be delivered to Companies House within 15 days of it being passed.
A fee of £10 is required to change the name (cheques made payable to “Companies House”).
Whether a private company qualifies to be a 'small-sized' or a 'medium-sized' company will depend on the company satisfying two of the following criteria:balance sheet total,turnover and number of employees.
A written resolution can be an ordinary or special resolution. If the company is passing a written resolution to change its name it must be a written special resolution. A meeting is not required but the resolution must be approved by a minimum of 75% of the members. A special resolution is a resolution passed at a general meeting of the company by 75% of those members entitled to vote.
The three steps of company change of name:
Step 1 Choose a new name for the company. The name will not be registered if it is the same as a name appearing in the index of company names kept by the Registrar of Companies (the Registrar). You may conduct a free company name search on the internet at the Companies Registry’s Cyber Search Centre (www.icris.cr.gov.hk) or at its Public Search Centre on the 13th floor of the Queensway Government Offices, 66 Queensway, Hong Kong. Use the “Exact Name Search” mode and input the full and exact new name that the company wishes to use.
Please note that the registrability of a company name can only be confirmed after the notification of change of name has been processed by the Companies Registry. The company name must also satisfy the relevant requirements of the Companies Ordinance.
Please refer to the Appendix for other points to note when choosing a company name.
Step 2 Pass a Special Resolution to change the company name. The Special Resolution need not be submitted to the Registry.
Step 3 Submit the specified form NC2 “Notification of Change of Company Name” with the appropriate fee to the Shroff on the 14th floor of the Queensway Government Offices within 15 days after the passing of the Special Resolution. For information on the fee structure, please refer to the information pamphlet “Price Guide to Main Services”.
(b) Advise Lorraine and Brenda whether they have to comply with the Registrar's request.
Assume that in the first financial year of Southend Fashion Designs Ltd, the company makes no profit and so declares no dividend. In the second financial year, the company has £900 profits available for distribution as dividend. In the third financial year a £1000 profits is available for distribution as dividend. You may assume that the directors declare a dividend on all profits available for distribution.
Lorraine and Brenda should not comply with the Register's request.
5000 issued capital shares@￡1=5000
1000 10%Preference Sharess@￡1
1000 Ordinary sharess@￡1
Distribution profits ￡ 900 (the second year)
Distribution profits ￡ 1000
Retained earnings ￡ 4400
Preference shares give preference over all other shares as to divided.Where they carry a fixed rate on dividend,it is implied that they are cumulative.
By acquiring its shares,the permanent capital of the company will be redeemed,the permanent capital of the company will be redeemed,the company must create a capital redemption reserve to compensate for the reduction of capital.
Assuming that the directors declare a dividend on all profits available for distribution,if recommended by the directors of BP, BP shareholders may, by resolution, declare dividends but no such dividend may be declared in excess of the amount recommended by the directors. The directors may also pay interim dividends without obtaining shareholder approval. No dividend may be paid other than out of profits available for distribution, as determined under UK GAAP and the UK Companies Act. Dividends on ordinary shares are payable only after payment of dividends on BP preference shares. Any dividend unclaimed after a period of twelve years from the date of declaration of such dividend shall be forfeited and reverts to BP.
The directors have the power to declare and pay dividends in any currency provided that a sterling equivalent is announced. It is not the Company's intention to change its current policy of paying dividends in US dollars.
Apart from shareholders' rights to share in BP's profits by dividend (if any is declared), the Articles of Association provide that the directors may set aside:
a special reserve fund out of the balance of profits each year to make up any deficit of cumulative dividend on the BP preference shares; and
a general reserve out of the balance of profits each year, which shall be applicable for any purpose to which the profits of the Company may properly be applied. This may include capitalization of such sum, pursuant to an ordinary shareholders' resolution, and distribution to shareholders as if it were distributed by way of a dividend on the ordinary shares or in paying up in full unissued ordinary shares for allotment and distribution as bonus shares.
Any such sums so deposited may be distributed in accordance with the manner of distribution of dividends as described above.
Holders of shares are not subject to calls on capital by the Company, provided that the amounts required to be paid on issue have been paid off. All shares are fully paid.
(c) Calculate how these profits would be distributed amongst the various classes of shareholders. (You should support your answer by reference to decided cases)
Assume that in the fifth financial year of the company, it goes into a members' voluntary liquidation, and, after all prior claims have been satisfied, the sum of £3,000 is available for repayment of shareholders' capital.
The payment for the shares must not be less than the nominal value of the shares(S.580).If the shares are issued at a discount the shareholder will have to pay the company the amount of the discount in cash with interest.Moreover,any subsequent purchaser,with knowledge of the discount,will also be liable for the discount.
The capital of the company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. There are two types of shares which a company may issue (1) Preference Shares (2) Equality Shares.
The 1900 ￡ profits available for distribution as dividend. refers to Cumulative Preference Share.If the company does no earn adequate profit in any year, dividends on preference shares may not be paid for that year. But if the preference shares are cumulative such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company, in subsequent years. Only after such arrears have been paid off, any dividend can be paid to the holder of quality shares. Thus a cumulative preference shareholder is sure to receive dividend on his shares for all the years our of the earnings of the company.
Share Premium Account & Revaluation Reserves
1 Definition of Share Premium
“A company may, without any special powers in its articles, issue its shares for a consideration (cash or assets) which is more than the nominal value of the shares. The excess is called ‘premium.”
2 Definition of Share Premium Account
“Company Act 2006 Section 610 states that a sum equivalent to the premium must be transferred into a special account known as the ‘Share Premium Account'. This amount also has to be specified in the company's balance sheet under a separate sub-heading.”
3 Three Purposes for Share Premium Account can be used
“The share premium account is treated as a capital account and cannot be used to pay a dividend; nor can it be reduced in any other way without leave of the courts except where it is applied in:
1 paying up new shares of the company to be issued to members as fully paid-up bonus shares; or
1 writing off expenses or the commission paid or discount allowed on, an issue of those shares (i.e., shares to underwriters at a discount). This means that the company can use the premium obtained from a particular issue of shares only to write off expenses etc incurred in respect of that issue;
1 providing for any premium payable by the company on the acquisition of its own shares if certain conditions set out in sections 687 (4) and 692 (3) are satisfied.”
4 A Special Situation of Share Premium
“There may be a situation where a company issues shares in exchange for shares in another company as part of an arrangement providing for the acquisition or merger of the two companies. Then if the shares received by the issuing company represent assets exceeding their nominal value, the issuing company can choose to treat the premium as merger reserves, or if it satisfies section 612 as profits. To treat the surplus as profits, the issuing company must be able to secure 90 percent of the equity shares of the merged company or, if such shares were divided into classes, then 90 percent of the shares of each class (s. 613). The issuing company is allowed to write down the shares received at their nominal value in the assets section of its balance sheet, thus ignoring the premium element of the shares. The provisions of sections 612 and 613 permit the use of ‘merger accounting' under SSAP 23.”
5 Definition of Revaluation Reserves
Revaluation reserve is an accounting term used when a company has to enter a line item on their balance sheet due to a revaluation performed on an asset. This line item is used when the revaluation finds the current and probable future value of the asset is higher than the recorded historic cost of the same asset.
A revaluation reserves fall under the category of supplementary capital, in that it does not reflect ordinary business results. Because of this revaluation, reserves typically are not counted as capital that can be leveraged for financial institution's, such as a bank's, contractual provisions.
6Purposes for Revaluation Reserves can be used
“In determining whether the company has distributable profits, the company must satisfy the realized profits test. This test provides that the ‘profits available for distribution' will be the company's accumulated realized profits (revenue and capital) in so far as they have not been previously utilized by a distribution or capitalization, less its accumulated realized losses (revenue and capital) in so far as they have not been previously written off in a reduction or reorganization of capital. Realized profits are the amount by which the revenue from sale then there is a realized loss for that financial year. Unrealized profits cannot be used to declare a dividend or to pay up debentures or amounts unpaid on issued shares (s. 849); but they may be used for paying up bonus shares (s. 280 (2)). Unrealized profits arise where the assets appreciate in value and the new value is recorded in the accounts. They will be shown in the accounts as revaluation reserves. If there is an overall decrease in the book value of the company's assets, this unrealized loss will be shown in the accounts as a debit balance in the revaluation reserves.”
Purchase or Redemption of Own Shares
Purchase of Shares
“Section 690 allows a company to purchase its own shares (including any redeemable shares) as long as the company pays for the shares in full at the time of the purchase. This section is subject to any provision in the company's articles restricting or prohibiting the company from purchasing its shares. The shares must be fully paid up before they can be purchased; and the effect of the purchase should not leave the company only with redeemable shares or, in the case of a public company, shares held as treasury shares. In addition, the company must obtain authority from its members to make the purchase. Members' authority is given by resolution. The type of resolution which members must pass depends on whether the purchase is an off-market purchase or a market purchase.”
Redemption of Shares
“Section 684 permits a company, if authorized by its articles (prior authorization to issue redeemable shares is not necessary if the company is a private company), to issue shares which are to be redeemed at a fixed date or at the option of either the company or the shareholder. To ensure that the company will never find itself in a situation where it has no member left, redeemable shares can only be issued if the company already has in existence issued shares which are non-redeemable. The shares must be fully paid up before they can be redeemed and the articles must set out the terms of redemption (e.g., the time of redemption and the payment on redemption).”
Two Reasons to Purchase or Redeem Own Shares
“A market purchase of its own shares by a public company may be affected as a means of using surplus cash advantageously, particularly where redeemable shares are listed at below their redemption price; also to re-arrange the company's capital (e.g., by purchasing non-redeemable preference shares to reduce gearing).”
1 Explanation to Reason One
To purchase or redeem company's own shares when the share price is too low is an efficient way to protect a company's reputation. If the share price is too low, it will have a negative effect on operation of a company. Moreover, shareholders may lose confidence to the company because of the low share price; customers may suspect the quality of products from the company, which could decrease the sales revenue and market share of the company. Therefore, the company purchases or redeems its own shares to support the share price and maintain the company's reputation. Meanwhile, shareholders will pay more attentions to the operation of the company and customers will be confident to the products again with the increasing share price.
2 Explanation to Reason Two
To purchase or redeem company's own shares is a useful method to re-arrange the company's capital. When a public company purchases or redeems its own shares, the capital is to be fully utilized and the earnings per share are enhanced as well.
3 Premium to be written off to Share Premium Account
According to the Company Act 2006 Section 687 (4) and Section 692 (3) permits that if the redeemable shares were issued at a premium, any premium payable on their redemption may be paid out of the proceeds of a fresh issue of shares made for the purposes of the redemption, up to an amount equal to-
(a) the aggregate of the premiums received by the company on the issue of the shares redeemed, or
(b) the current amount of the company's share premium account (including any sum transferred to that account in respect of premiums on the new shares),
whichever is the less.
Section 692 (4) permits that the amount of the company's share premium account is reduced by a sum corresponding (or by sums in the aggregate corresponding) to the amount of any payment made under subsection (3).
4 The Entire Premium CANNOT be written off to the Share Premium Account
As I mentioned in 2.3, only “the lower of (a) and (b) can be deducted from the share premium account. The unrelieved balance has to be deducted from distributable profits.”
Therefore, in this case, (a) the aggregate of the premiums received by the company on the issue of the shares redeemed is £2,500 and (b) the current amount of the company's share premium account is £10,500, that is to say, only £2,500 can be written off to the share premium account.
A member who transfer his shares does not give an implied warranty that the transfer would be registered(London Founders Association V Clarke(1888)).Where the member is not transferring all of his shares in the share certificate to one transferee,the member will send the documents to the company for registration and a procedure called certification of transfer will apply.
In conclusion, I have assessed the share premium account and revaluation reserves, redemption or purchase of own shares, the conditions must be satisfied when premium to be written off to the share premium account, the entire premium cannot be written off to the share premium account, the revised balance sheet of Southend Fashion Designs Ltd after shares are redeemed and redenomination. Southend Fashion Designs Ltd would have ordinary shares of £5000 and net assets of£4400 if the directors redeem all the redeemable shares for £1000 and issue 5,000 new shares of £1 each for £5,500.
(d) State how this sum will be distributed between the various classes of shareholders.
(You should support your answer by reference to decided cases).
The answer is that you can do pretty much what you want when it comes to share rights. Think of it this way: shares have three main characteristics (a) income, i.e. dividend if payable, (b) capital (on sale, listing on a stock exchange, solvent winding up) and (c) voting. You can pretty much do what you want to set out different characteristics for each class of share.
So in answer to your questions (1). Yes. Correct.
(2) Yes you can be a shareholder and director. But try not to confuse the roles - you have obligations to the company as a director. The other shareholders are likely to want some kind of protection to prevent you abusing the voting rights you have as a shareholder (e.g. to issue new shares to dilute their interests) or taking certain management decisions (e.g. to inflate your salary at the expense of their dividends). That kind of thing is usually found in a shareholders agreement but the different class of shares are usually put in the articles of association of a company.
(3) You can set out different dividend rights between Class A and Class B. Remember you need to have distributable profits before you can declare and dividend. You can structure it so that Class A gets the first £20k of dividends. If you own all 80 Class A you get all of that £20k. You can give class B dividend rights, - they get the next £100k after the A share dividend. They would split it between the holders of the B Shares in relation to the number of shares held by them. Alternatively you can say the holders of A shares get 16.67% of the dividends and the B shareholders 83.33%. You can cut the pie however you want and add in time factors too. Remember too that it is often better for your tax to receive your income as dividend rather than salary.
(4) When you come to sell you can specify whether the B Shares get any share of the capital or not. FOr your protection you should include 'drag' rights in the shareholders agreement or articles. It's a clause that enables you to force the minority shareholders to sell their shares on the same terms as the majority sell (or on whatever terms the B shares have). It prevents a minority blocking a sale - no buyer will want to buy anything less than 100% of the shares in a private company.
Sorry but a company formation agent will not be able to help you with any of the above. It should be straightforward for a solicitor who knows his stuff. That;s the difficult part - finding the right solicitor. If you let me know where you're based I can recommend a couple.
Oh, and do not start a PLC unless you're talking about megabucks. PLCs are completely unsuitable for start up businesses.
The usual way this works is for preference shareholders (who are often sleeping investors not involved with day to day running) to have some form of preference shares whereby they do not have voting rights but in consideration of this get a preference dividend of a fixed percentage, say 5% p.a. which is paid ahead of the dividend to the A holders (which would be so many pence in the pound for the year or half year). The articles would be drafted so as the B holders do not participate in a distribution on winding up and may include restrictions on transferring their shares, e.g. they may have to cancel them or transfer them to existing shareholders rather than an outsider - of course this can be applied to all holders. You can try to simply restrict the B holders' voting rights but without a preference dividend why would they find this offer attractive ?
References
Company Law : De Freitas – Chapters 2,4, 5 and 7
Company Law: Mayson, French & Ryan – Chapters 3 - 10
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 101-102.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. p. 145.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 125-126.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 127-128.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. p. 133.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 96-97.
http://www.completeformations.co.uk/companyfaqs/shareholders/share_premium.html16/11/2008
http://www.investopedia.com/terms/r/revaluationreserves.asp 16/11/2008
http://www.investopedia.com/terms/r/redenomination.asp 16/11/2008
http://0-uk.westlaw.com.lispac.lsbu.ac.uk/result/default.wl?rltdb=CLID_DB476224513131811&srch=TRUE&db=UK-LIF&sv=Split&service=Search&eq=welcome/WestlawUK&fmqv=s&tempinfo=|MethodTNC|dbUK-LIF|tiduk_u|SearchByNameFNCompany+Act+2006|ProvisionNoSectionEtcFN687&method=TNC&action=Search&query=TI(COMPANY+/3+ACT+/3+2006)+&+CA(687)&mt=WestlawUK&fn=_top&origin=Search&vr=2.0&rlt=CLID_QRYRLT175604613131811&rp=/welcome/WestlawUK/default.wl&ifm=NotSet&sp=uksbu-000&rs=WLUK8.11 18/11/2008
Companies House：
http://www.companieshouse.gov.uk/index.shtml
http://www.companieshouse.gov.uk/
http://www.companieshouse.gov.uk/forms/introduction.shtml
Register a Company - Setting up a UK Company - Formation, Registration and Set-up
http://www.completeformations.co.uk/companyfaqs/index.html
FREE Company Formation | FREE Company Registration | FREE Business Registration
http://www.thecompanywarehouse.co.uk/
http://www.wikinvest.com/special/Concepts?select=Finance
http://www.wikinvest.com/site/Personal_Finance
Rajput Brotherhood: A blog focused on technology and web-development.
http://www.rajputbrotherhood.com/
Reference For Business - Encyclopedia of Small Business, Business Biographies, Business Plans, and Encyclopedia of American Industries
http://www.referenceforbusiness.com/index.html
Course: BAAF2 Corporate Law
DeadlineDate: 16/12/2010
Student Name: Sarah
Introduction and Background
Southend Fashion Designs Ltd
Lorraine, Brenda and Pam wish to transfer their existing business to a company so that they could obtain the benefit of limited liability. The company is to be called “Southend Fashion Designs Ltd.”They instruct their solicitor, Michelle, to prepare the necessary documentation. The company is to have an issued share capital of 5000 £1 shares. Lorraine, Brenda and Pam will each hold 1000 10% preference shares, and Jade and Ivor will each hold 1000 ordinary shares. All the shares are to be fully paid up. The directors are to be Lorraine and Brenda.
On 4th September 2010, Lorraine hears that Compute Ltd. is selling computers cheaply and she signs a contract to purchase one on behalf of her company. She signs the contract in the following way:“Lorraine, agent of Southend Fashion Designs Ltd.”
In early September 2010, Southend Fashion Designs Ltd. receives its certificate of incorporation. The Registrar issues the certificate on 11th September 2010, but in error inserted 11the November as the date of the certificate.
Lorraine and Brenda hold a board meeting at which they ratify the contract with Compute Ltd. Shortly afterwards Compute Ltd telephone Lorraine to say that the computer that she ordered is now only available with a double disc drive and not a single disc drive as agreed. There is a small increase in the cost but nevertheless Lorrain agrees to this and signs a letter approving the alteration.
Michelle and Compute Ltd have not been paid.
Company Name:
Southend Fashion Designs Ltd
5000 shares@￡1=5000
1000 10%Preference Sharess@￡1
1000 Ordinary sharess@￡1
The company can freely change its name by passing a special resolution or by any other means provided by its articles and by altering its constitution to reflect the change.
Company can buy its own shares,and shares in Lorraine and Brenda must be fully paid up.Company must have issued shares which are non-redeemable shares.Company must obtain its shareholders' permission before it can buy back the shares,Private purchases-special resolution to give permission.
According to the case,the company should obey the pre-incorporation contracts.The general rule is that the company cannot be sued on a pre-incorporation contracts;not even if the company purported to ratify the contracts.
(a) Advise Michelle and Compute Ltd.
On 20th December 2010, Southend Fashion Designs Ltd. receives a letter from the Companies Registrar informing its directors that they should change the company's name.
As Lorraine signs the contract in the following way:“Lorraine, agent of Southend Fashion Designs Ltd.” ,the department for Business,Enterprise and Regulatory Reform(BERR)can also compel the company to change its name to be “Southend Fashion Designs Ltd.” ,but its power to do so is statutorily regulated,depending on the reason for requesting the name change.
Since the Ltd's name is the same or is too similar to that of an existing company,BEER can force the new company to change its name within one year of incorporation.
A company can change its name by:
· special resolution; or
· by means provided for in the company’s articles;
If you change the company’s name by special resolution you must file a copy of the resolution and form NM01. The NM01 must include the appropriate fee.
COMPANIES ACT 2006
SPECIAL RESOLUTION ON CHANGE OF NAME
Company number: _________________________________________
Existing company name: ___________________________________________
At an Annual General Meeting* / General meeting* (*delete as appropriate)
of the members of the above named company, duly convened and held at:
On the ____________ day of ___________ 20______
That the name of the company be changed to:
New name:
Signed: _______________________________
*Director / secretary / CIC Manager (if appropriate) / administrator / administrative receiver / receiver manager / receiver, on behalf of the company.
(*delete as appropriate)
Notes:
This form is for use by PLC’s or private companies who choose to hold Annual General Meetings or general meetings for the purpose of a special resolution.
A copy of the resolution must be delivered to Companies House within 15 days of it being passed.
A fee of £10 is required to change the name (cheques made payable to “Companies House”).
Whether a private company qualifies to be a 'small-sized' or a 'medium-sized' company will depend on the company satisfying two of the following criteria:balance sheet total,turnover and number of employees.
A written resolution can be an ordinary or special resolution. If the company is passing a written resolution to change its name it must be a written special resolution. A meeting is not required but the resolution must be approved by a minimum of 75% of the members. A special resolution is a resolution passed at a general meeting of the company by 75% of those members entitled to vote.
The three steps of company change of name:
Step 1 Choose a new name for the company. The name will not be registered if it is the same as a name appearing in the index of company names kept by the Registrar of Companies (the Registrar). You may conduct a free company name search on the internet at the Companies Registry’s Cyber Search Centre (www.icris.cr.gov.hk) or at its Public Search Centre on the 13th floor of the Queensway Government Offices, 66 Queensway, Hong Kong. Use the “Exact Name Search” mode and input the full and exact new name that the company wishes to use.
Please note that the registrability of a company name can only be confirmed after the notification of change of name has been processed by the Companies Registry. The company name must also satisfy the relevant requirements of the Companies Ordinance.
Please refer to the Appendix for other points to note when choosing a company name.
Step 2 Pass a Special Resolution to change the company name. The Special Resolution need not be submitted to the Registry.
Step 3 Submit the specified form NC2 “Notification of Change of Company Name” with the appropriate fee to the Shroff on the 14th floor of the Queensway Government Offices within 15 days after the passing of the Special Resolution. For information on the fee structure, please refer to the information pamphlet “Price Guide to Main Services”.
(b) Advise Lorraine and Brenda whether they have to comply with the Registrar's request.
Assume that in the first financial year of Southend Fashion Designs Ltd, the company makes no profit and so declares no dividend. In the second financial year, the company has £900 profits available for distribution as dividend. In the third financial year a £1000 profits is available for distribution as dividend. You may assume that the directors declare a dividend on all profits available for distribution.
Lorraine and Brenda should not comply with the Register's request.
5000 issued capital shares@￡1=5000
1000 10%Preference Sharess@￡1
1000 Ordinary sharess@￡1
Distribution profits ￡ 900 (the second year)
Distribution profits ￡ 1000
Retained earnings ￡ 4400
Preference shares give preference over all other shares as to divided.Where they carry a fixed rate on dividend,it is implied that they are cumulative.
By acquiring its shares,the permanent capital of the company will be redeemed,the permanent capital of the company will be redeemed,the company must create a capital redemption reserve to compensate for the reduction of capital.
Assuming that the directors declare a dividend on all profits available for distribution,if recommended by the directors of BP, BP shareholders may, by resolution, declare dividends but no such dividend may be declared in excess of the amount recommended by the directors. The directors may also pay interim dividends without obtaining shareholder approval. No dividend may be paid other than out of profits available for distribution, as determined under UK GAAP and the UK Companies Act. Dividends on ordinary shares are payable only after payment of dividends on BP preference shares. Any dividend unclaimed after a period of twelve years from the date of declaration of such dividend shall be forfeited and reverts to BP.
The directors have the power to declare and pay dividends in any currency provided that a sterling equivalent is announced. It is not the Company's intention to change its current policy of paying dividends in US dollars.
Apart from shareholders' rights to share in BP's profits by dividend (if any is declared), the Articles of Association provide that the directors may set aside:
a special reserve fund out of the balance of profits each year to make up any deficit of cumulative dividend on the BP preference shares; and
a general reserve out of the balance of profits each year, which shall be applicable for any purpose to which the profits of the Company may properly be applied. This may include capitalization of such sum, pursuant to an ordinary shareholders' resolution, and distribution to shareholders as if it were distributed by way of a dividend on the ordinary shares or in paying up in full unissued ordinary shares for allotment and distribution as bonus shares.
Any such sums so deposited may be distributed in accordance with the manner of distribution of dividends as described above.
Holders of shares are not subject to calls on capital by the Company, provided that the amounts required to be paid on issue have been paid off. All shares are fully paid.
(c) Calculate how these profits would be distributed amongst the various classes of shareholders. (You should support your answer by reference to decided cases)
Assume that in the fifth financial year of the company, it goes into a members' voluntary liquidation, and, after all prior claims have been satisfied, the sum of £3,000 is available for repayment of shareholders' capital.
The payment for the shares must not be less than the nominal value of the shares(S.580).If the shares are issued at a discount the shareholder will have to pay the company the amount of the discount in cash with interest.Moreover,any subsequent purchaser,with knowledge of the discount,will also be liable for the discount.
The capital of the company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. There are two types of shares which a company may issue (1) Preference Shares (2) Equality Shares.
The 1900 ￡ profits available for distribution as dividend. refers to Cumulative Preference Share.If the company does no earn adequate profit in any year, dividends on preference shares may not be paid for that year. But if the preference shares are cumulative such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company, in subsequent years. Only after such arrears have been paid off, any dividend can be paid to the holder of quality shares. Thus a cumulative preference shareholder is sure to receive dividend on his shares for all the years our of the earnings of the company.
Share Premium Account & Revaluation Reserves
1 Definition of Share Premium
“A company may, without any special powers in its articles, issue its shares for a consideration (cash or assets) which is more than the nominal value of the shares. The excess is called ‘premium.”
2 Definition of Share Premium Account
“Company Act 2006 Section 610 states that a sum equivalent to the premium must be transferred into a special account known as the ‘Share Premium Account'. This amount also has to be specified in the company's balance sheet under a separate sub-heading.”
3 Three Purposes for Share Premium Account can be used
“The share premium account is treated as a capital account and cannot be used to pay a dividend; nor can it be reduced in any other way without leave of the courts except where it is applied in:
1 paying up new shares of the company to be issued to members as fully paid-up bonus shares; or
1 writing off expenses or the commission paid or discount allowed on, an issue of those shares (i.e., shares to underwriters at a discount). This means that the company can use the premium obtained from a particular issue of shares only to write off expenses etc incurred in respect of that issue;
1 providing for any premium payable by the company on the acquisition of its own shares if certain conditions set out in sections 687 (4) and 692 (3) are satisfied.”
4 A Special Situation of Share Premium
“There may be a situation where a company issues shares in exchange for shares in another company as part of an arrangement providing for the acquisition or merger of the two companies. Then if the shares received by the issuing company represent assets exceeding their nominal value, the issuing company can choose to treat the premium as merger reserves, or if it satisfies section 612 as profits. To treat the surplus as profits, the issuing company must be able to secure 90 percent of the equity shares of the merged company or, if such shares were divided into classes, then 90 percent of the shares of each class (s. 613). The issuing company is allowed to write down the shares received at their nominal value in the assets section of its balance sheet, thus ignoring the premium element of the shares. The provisions of sections 612 and 613 permit the use of ‘merger accounting' under SSAP 23.”
5 Definition of Revaluation Reserves
Revaluation reserve is an accounting term used when a company has to enter a line item on their balance sheet due to a revaluation performed on an asset. This line item is used when the revaluation finds the current and probable future value of the asset is higher than the recorded historic cost of the same asset.
A revaluation reserves fall under the category of supplementary capital, in that it does not reflect ordinary business results. Because of this revaluation, reserves typically are not counted as capital that can be leveraged for financial institution's, such as a bank's, contractual provisions.
6Purposes for Revaluation Reserves can be used
“In determining whether the company has distributable profits, the company must satisfy the realized profits test. This test provides that the ‘profits available for distribution' will be the company's accumulated realized profits (revenue and capital) in so far as they have not been previously utilized by a distribution or capitalization, less its accumulated realized losses (revenue and capital) in so far as they have not been previously written off in a reduction or reorganization of capital. Realized profits are the amount by which the revenue from sale then there is a realized loss for that financial year. Unrealized profits cannot be used to declare a dividend or to pay up debentures or amounts unpaid on issued shares (s. 849); but they may be used for paying up bonus shares (s. 280 (2)). Unrealized profits arise where the assets appreciate in value and the new value is recorded in the accounts. They will be shown in the accounts as revaluation reserves. If there is an overall decrease in the book value of the company's assets, this unrealized loss will be shown in the accounts as a debit balance in the revaluation reserves.”
Purchase or Redemption of Own Shares
Purchase of Shares
“Section 690 allows a company to purchase its own shares (including any redeemable shares) as long as the company pays for the shares in full at the time of the purchase. This section is subject to any provision in the company's articles restricting or prohibiting the company from purchasing its shares. The shares must be fully paid up before they can be purchased; and the effect of the purchase should not leave the company only with redeemable shares or, in the case of a public company, shares held as treasury shares. In addition, the company must obtain authority from its members to make the purchase. Members' authority is given by resolution. The type of resolution which members must pass depends on whether the purchase is an off-market purchase or a market purchase.”
Redemption of Shares
“Section 684 permits a company, if authorized by its articles (prior authorization to issue redeemable shares is not necessary if the company is a private company), to issue shares which are to be redeemed at a fixed date or at the option of either the company or the shareholder. To ensure that the company will never find itself in a situation where it has no member left, redeemable shares can only be issued if the company already has in existence issued shares which are non-redeemable. The shares must be fully paid up before they can be redeemed and the articles must set out the terms of redemption (e.g., the time of redemption and the payment on redemption).”
Two Reasons to Purchase or Redeem Own Shares
“A market purchase of its own shares by a public company may be affected as a means of using surplus cash advantageously, particularly where redeemable shares are listed at below their redemption price; also to re-arrange the company's capital (e.g., by purchasing non-redeemable preference shares to reduce gearing).”
1 Explanation to Reason One
To purchase or redeem company's own shares when the share price is too low is an efficient way to protect a company's reputation. If the share price is too low, it will have a negative effect on operation of a company. Moreover, shareholders may lose confidence to the company because of the low share price; customers may suspect the quality of products from the company, which could decrease the sales revenue and market share of the company. Therefore, the company purchases or redeems its own shares to support the share price and maintain the company's reputation. Meanwhile, shareholders will pay more attentions to the operation of the company and customers will be confident to the products again with the increasing share price.
2 Explanation to Reason Two
To purchase or redeem company's own shares is a useful method to re-arrange the company's capital. When a public company purchases or redeems its own shares, the capital is to be fully utilized and the earnings per share are enhanced as well.
3 Premium to be written off to Share Premium Account
According to the Company Act 2006 Section 687 (4) and Section 692 (3) permits that if the redeemable shares were issued at a premium, any premium payable on their redemption may be paid out of the proceeds of a fresh issue of shares made for the purposes of the redemption, up to an amount equal to-
(a) the aggregate of the premiums received by the company on the issue of the shares redeemed, or
(b) the current amount of the company's share premium account (including any sum transferred to that account in respect of premiums on the new shares),
whichever is the less.
Section 692 (4) permits that the amount of the company's share premium account is reduced by a sum corresponding (or by sums in the aggregate corresponding) to the amount of any payment made under subsection (3).
4 The Entire Premium CANNOT be written off to the Share Premium Account
As I mentioned in 2.3, only “the lower of (a) and (b) can be deducted from the share premium account. The unrelieved balance has to be deducted from distributable profits.”
Therefore, in this case, (a) the aggregate of the premiums received by the company on the issue of the shares redeemed is £2,500 and (b) the current amount of the company's share premium account is £10,500, that is to say, only £2,500 can be written off to the share premium account.
A member who transfer his shares does not give an implied warranty that the transfer would be registered(London Founders Association V Clarke(1888)).Where the member is not transferring all of his shares in the share certificate to one transferee,the member will send the documents to the company for registration and a procedure called certification of transfer will apply.
In conclusion, I have assessed the share premium account and revaluation reserves, redemption or purchase of own shares, the conditions must be satisfied when premium to be written off to the share premium account, the entire premium cannot be written off to the share premium account, the revised balance sheet of Southend Fashion Designs Ltd after shares are redeemed and redenomination. Southend Fashion Designs Ltd would have ordinary shares of £5000 and net assets of£4400 if the directors redeem all the redeemable shares for £1000 and issue 5,000 new shares of £1 each for £5,500.
(d) State how this sum will be distributed between the various classes of shareholders.
(You should support your answer by reference to decided cases).
The answer is that you can do pretty much what you want when it comes to share rights. Think of it this way: shares have three main characteristics (a) income, i.e. dividend if payable, (b) capital (on sale, listing on a stock exchange, solvent winding up) and (c) voting. You can pretty much do what you want to set out different characteristics for each class of share.
So in answer to your questions (1). Yes. Correct.
(2) Yes you can be a shareholder and director. But try not to confuse the roles - you have obligations to the company as a director. The other shareholders are likely to want some kind of protection to prevent you abusing the voting rights you have as a shareholder (e.g. to issue new shares to dilute their interests) or taking certain management decisions (e.g. to inflate your salary at the expense of their dividends). That kind of thing is usually found in a shareholders agreement but the different class of shares are usually put in the articles of association of a company.
(3) You can set out different dividend rights between Class A and Class B. Remember you need to have distributable profits before you can declare and dividend. You can structure it so that Class A gets the first £20k of dividends. If you own all 80 Class A you get all of that £20k. You can give class B dividend rights, - they get the next £100k after the A share dividend. They would split it between the holders of the B Shares in relation to the number of shares held by them. Alternatively you can say the holders of A shares get 16.67% of the dividends and the B shareholders 83.33%. You can cut the pie however you want and add in time factors too. Remember too that it is often better for your tax to receive your income as dividend rather than salary.
(4) When you come to sell you can specify whether the B Shares get any share of the capital or not. FOr your protection you should include 'drag' rights in the shareholders agreement or articles. It's a clause that enables you to force the minority shareholders to sell their shares on the same terms as the majority sell (or on whatever terms the B shares have). It prevents a minority blocking a sale - no buyer will want to buy anything less than 100% of the shares in a private company.
Sorry but a company formation agent will not be able to help you with any of the above. It should be straightforward for a solicitor who knows his stuff. That;s the difficult part - finding the right solicitor. If you let me know where you're based I can recommend a couple.
Oh, and do not start a PLC unless you're talking about megabucks. PLCs are completely unsuitable for start up businesses.
The usual way this works is for preference shareholders (who are often sleeping investors not involved with day to day running) to have some form of preference shares whereby they do not have voting rights but in consideration of this get a preference dividend of a fixed percentage, say 5% p.a. which is paid ahead of the dividend to the A holders (which would be so many pence in the pound for the year or half year). The articles would be drafted so as the B holders do not participate in a distribution on winding up and may include restrictions on transferring their shares, e.g. they may have to cancel them or transfer them to existing shareholders rather than an outsider - of course this can be applied to all holders. You can try to simply restrict the B holders' voting rights but without a preference dividend why would they find this offer attractive ?
References
Company Law : De Freitas – Chapters 2,4, 5 and 7
Company Law: Mayson, French & Ryan – Chapters 3 - 10
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 101-102.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. p. 145.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 125-126.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 127-128.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. p. 133.
De Freitas, J. D. (2009) Company law. Castlevale Limited, London. pp. 96-97.
http://www.completeformations.co.uk/companyfaqs/shareholders/share_premium.html16/11/2008
http://www.investopedia.com/terms/r/revaluationreserves.asp 16/11/2008
http://www.investopedia.com/terms/r/redenomination.asp 16/11/2008
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