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    Hello TSR I'm totally lost

    Peppa and George are directors of Splashabout Ltd., a company which manufactures raincoats, wellington boots and other rainwear. Peppa owns 50% of the company’s shares and George owns the other 50% of the company’s shares. The company’s issued share capital is presently £1000, with the share capital divided into 1000 shares with a nominal value of £1. Peppa and George are keen to develop the company’s business and have two potential offers of additional investment.

    Suzy has offered to invest £10,000 in the business. In exchange for this she would like to be assured of a seat on the company’s board. Peppa and George are keen to secure Suzy’s investment, but are concerned to ensure that the company’s business remains focused on rainwear and associated equipment. They are willing to allow Suzy a seat on the board, but Page 2 of 3 wish to be sure that Suzy does not obtain absolute power over the destiny of the company through her large investment.

    Delphine has offered a further £20,000 of investment. Delphine has made it clear that she has no desire to be involved in the running of the business, but would like to ensure that her money remains as safe as possible.


    So For Delphine, I'd recommend preference shares of some sort, non-voting but her money remains safe. This seems fairly straightforward, but for Suzy I'm totally lost.

    If they issue her 1000 shares like that they have and she pays 10,000 then 9000 would have to go into the share premium account, which they can't use for anything other than the costs associated with issuing the shares, which doesn't make a lot of sense.

    But if she buys 10,000 shares at the nominal value of £1 then she'd have ultimate control of the company which they don't want.

    I don't see how she can invest 10,000 but not get control of the company when they've only put 1000 in each.

    I guess really I don't understand the nominal value v price v underlying actual value of shares thing.

    Having a bit of a meltdown though.

    (Original post by Mr_Deeds)
    *to the rescue*
    (Original post by jacketpotato)
    *to the rescue*
    (Original post by Prudy)
    *to the rescue
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    Think you are getting confused re: nominal value and actual value. Its best to completely ignore the fact that nominal values are denominated in currency for the purposes of a question like this. They might as well be denominated in roflcakes or lolcats. Nominal values are not really worth worrying about.

    RE: share premium accounts, if 10,000 shares were bought for £10,000 all that money would go to the capital account. All the same restrictions that apply to the share premium account apply to this account too. The company could use the money after a capital reduction, so this is a very viable possibility. I also wonder whether the Co could buy-back some of Peppa's/George's shares and resell those to Suzy/Delphine. THis isn't really a mechanics question though, not worth getting too bogged down here.

    RE: the question, think carefully about the different things that could be done.

    In both cases, the question says "invest" but doesn't say "shares". The money could be lent to the company like a bank loan.
    Pros for Suzy: Could ensure she has a place on the company's board by an appropriate warranty in the loan agreement. Cons: As a nominee director would still owe duties to the company which may conflict with her wishes as lender. Doesn't give such direct control over the company.
    Pros for Delphine: Arms-length involvement, lenders get paid out before shareholders in the event of an insolvency. Could take security over the company's assets. Cons: No direct control over company. Frankly Delphine looks like she should be lending debt rather than buying equity.

    Then I'd briefly consider the protections available to shareholders under the Companies Act. Whether Suzy/Delp have control by virtue of their shareholdings depends on how much they have, 50% to pass a OR and 75% to pass a SR, but note that Peppa/George will have a majority on the board (assuming they are both directors). But need to mention directors' duties and the protection of s260/s994.

    Another option is to put something in the articles.
    Suzy could use this to say she must be a director, Delphine could use it e.g. to limit the circumstances under Peppa/George can distribute capital and provide for appropriate safeguards. Peppa/George could insert an objects clause saying that the company's object is to produce rainwear/associated equipment (though there are problems with this).
    Cons are that, although the articles are a statutory contract under s33, they are with the company and are thus difficult to enforce directly against the other shareholders. Obviously, they can be changed by special resolution, of concern if Peppa/George together (or just Suzy/Delphine) have 75% or more of the shares.

    Another option is to create different classes of shares, there are various pros as you pointed out (e.g. Delph could ensure that she gets paid out in preference to the other shareholders on a winding-up), but of course the articles can be changed if a special resolution is passed, and in any event shareholders rank below creditors on a winding-up.

    Another option is a shareholders' agreement.
    Pros are that it is enforceable against the other parties to that agreement as a contract. It would be relatively straightforward to for there to be a provision saying that the company should not be moved away from rainwear etc., and it would be easier to amend the contract (where all parties agree) should everyone involved want the company to diversify in future. In Delphine's case, various protections could be inserted. Can include enforceable mechanisms for dispute resolution (such as buy-outs). No obvious cons.

    In real-life Suzy would sign a Shareholders' Agreement and Delphine would be a secured lender, I think...
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    (Original post by jacketpotato)
    Think you are getting confused re: nominal value and actual value. Its best to completely ignore the fact that nominal values are denominated in currency for the purposes of a question like this. They might as well be denominated in roflcakes or lolcats. Nominal values are not really worth worrying about.

    RE: share premium accounts, if 10,000 shares were bought for £10,000 all that money would go to the capital account. All the same restrictions that apply to the share premium account apply to this account too. The company could use the money after a capital reduction, so this is a very viable possibility. I also wonder whether the Co could buy-back some of Peppa's/George's shares and resell those to Suzy/Delphine. THis isn't really a mechanics question though, not worth getting too bogged down here.

    RE: the question, think carefully about the different things that could be done.

    In both cases, the question says "invest" but doesn't say "shares". The money could be lent to the company like a bank loan.
    Pros for Suzy: Could ensure she has a place on the company's board by an appropriate warranty in the loan agreement. Cons: As a nominee director would still owe duties to the company which may conflict with her wishes as lender. Doesn't give such direct control over the company.
    Pros for Delphine: Arms-length involvement, lenders get paid out before shareholders in the event of an insolvency. Could take security over the company's assets. Cons: No direct control over company. Frankly Delphine looks like she should be lending debt rather than buying equity.

    Then I'd briefly consider the protections available to shareholders under the Companies Act. Whether Suzy/Delp have control by virtue of their shareholdings depends on how much they have, 50% to pass a OR and 75% to pass a SR, but note that Peppa/George will have a majority on the board (assuming they are both directors). But need to mention directors' duties and the protection of s260/s994.

    Another option is to put something in the articles.
    Suzy could use this to say she must be a director, Delphine could use it e.g. to limit the circumstances under Peppa/George can distribute capital and provide for appropriate safeguards. Peppa/George could insert an objects clause saying that the company's object is to produce rainwear/associated equipment (though there are problems with this).
    Cons are that, although the articles are a statutory contract under s33, they are with the company and are thus difficult to enforce directly against the other shareholders. Obviously, they can be changed by special resolution, of concern if Peppa/George together (or just Suzy/Delphine) have 75% or more of the shares.

    Another option is to create different classes of shares, there are various pros as you pointed out (e.g. Delph could ensure that she gets paid out in preference to the other shareholders on a winding-up), but of course the articles can be changed if a special resolution is passed, and in any event shareholders rank below creditors on a winding-up.

    Another option is a shareholders' agreement.
    Pros are that it is enforceable against the other parties to that agreement as a contract. It would be relatively straightforward to for there to be a provision saying that the company should not be moved away from rainwear etc., and it would be easier to amend the contract (where all parties agree) should everyone involved want the company to diversify in future. In Delphine's case, various protections could be inserted. Can include enforceable mechanisms for dispute resolution (such as buy-outs). No obvious cons.

    In real-life Suzy would sign a Shareholders' Agreement and Delphine would be a secured lender, I think...
    Thankyou =)

    but if Suzy buys 10,000 shares she will have ultimate control of the company, how do I prevent her from getting all the power?
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    (Original post by The_Goose)
    Thankyou =)

    but if Suzy buys 10,000 shares she will have ultimate control of the company, how do I prevent her from getting all the power?
    She could buy, say, 1,000 newly issued shares for £10,000 in which case she would have 50%. Or any other appropriate combination.
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    (Original post by jacketpotato)
    She could buy, say, 1,000 newly issued shares for £10,000 in which case she would have 50%. Or any other appropriate combination.
    If she buys 1000 shares for 10,000 how can the company use the money? Is it allowed to go into the company bank account? I can only find capital reduction stuff relating to distribution to shareholders, which isn't what they'd want to do.

    I'm probably just being really thick but I can't get my head round it
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    (Original post by The_Goose)
    If she buys 1000 shares for 10,000 how can the company use the money? Is it allowed to go into the company bank account? I can only find capital reduction stuff relating to distribution to shareholders, which isn't what they'd want to do.

    I'm probably just being really thick but I can't get my head round it
    You need to remember that the problems with buying 1000 shares for £10,000 are the same as buying 10,000 for £10,000. The nominal value of shares is share capital, this is just as restricted (in fact it is more restricted) than share premium. The restrictions relating to the two are the same, the only difference is that there are two exceptions for share premium (i.e. paying the costs associated with issuing the shares) that you don't have for share capital (see the relevant sections of the CA). So buying 10,000 shares for £10,000 doesn't actually help.

    In both cases, the money the company receives from the sale of the shares goes into the company's bank account and can be used to buy equipment/premises/whatever. What you can't do with that money is distribute it to the shareholders, for that you'd need a reduction of capital. But the company can still use the money. The point of capital maintainance provisions is to protect creditors so that there is something there if the company goes bust, they don't force the money to sit and do nothing.
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    (Original post by jacketpotato)
    You need to remember that the problems with buying 1000 shares for £10,000 are the same as buying 10,000 for £10,000. The nominal value of shares is share capital, this is just as restricted (in fact it is more restricted) than share premium. The restrictions relating to the two are the same, the only difference is that there are two exceptions for share premium (i.e. paying the costs associated with issuing the shares) that you don't have for share capital (see the relevant sections of the CA). So buying 10,000 shares for £10,000 doesn't actually help.

    In both cases, the money the company receives from the sale of the shares goes into the company's bank account and can be used to buy equipment/premises/whatever. What you can't do with that money is distribute it to the shareholders, for that you'd need a reduction of capital. But the company can still use the money. The point of capital maintainance provisions is to protect creditors so that there is something there if the company goes bust, they don't force the money to sit and do nothing.
    Oh. I thought that they weren't allowed to do anything with it. So they could use the £10,000 to expand factory/ buy Wellington boot material, hire staff etc?

    I also need to have a look at the issue of her being guaranteed a seat on the board, because I think there's limits on this, but I'm thinking maybe a shareholder agreement would be the best option?
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    (Original post by The_Goose)
    Oh. I thought that they weren't allowed to do anything with it. So they could use the £10,000 to expand factory/ buy Wellington boot material, hire staff etc?

    I also need to have a look at the issue of her being guaranteed a seat on the board, because I think there's limits on this, but I'm thinking maybe a shareholder agreement would be the best option?
    Yes

    You could put it in the articles too, or say in the articles "X is director" and then have in the SHA that the articles can't be changed wihtout unanimous consent.
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    (Original post by jacketpotato)
    Yes

    You could put it in the articles too, or say in the articles "X is director" and then have in the SHA that the articles can't be changed wihtout unanimous consent.
    I love you jacketpotato.

    All the rep over which I have power is hurtling its way towards you.
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    (Original post by The_Goose)
    I love you jacketpotato.

    All the rep over which I have power is hurtling its way towards you.
    Think it pushed me to 5gems, oh yeah :borat:
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    (Original post by jacketpotato)
    Think it pushed me to 5gems, oh yeah :borat:
    =D I love gems =)
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    (Original post by jacketpotato)
    Think it pushed me to 5gems, oh yeah :borat:
    *rep envy*
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    (Original post by jacketpotato)
    Think it pushed me to 5gems, oh yeah :borat:
    So I'm still a bit confuddled. According to the act you can only use the share premium account for alloting new shares and paying commission. But the reduction of share capital stuff only seems to apply when they want to distribute it back to shareholders not when they want to buy a factory with it.

    Also if Delphione lends them £20,000 as a creditor doesn't that mean they wouldn't be able to reduce the share capital anyway because they have to have enough to ay their debts?
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    (Original post by The_Goose)
    So I'm still a bit confuddled. According to the act you can only use the share premium account for alloting new shares and paying commission. But the reduction of share capital stuff only seems to apply when they want to distribute it back to shareholders not when they want to buy a factory with it.

    Also if Delphione lends them £20,000 as a creditor doesn't that mean they wouldn't be able to reduce the share capital anyway because they have to have enough to ay their debts?
    That's not what the Act says - it says that you can allott bonus shares/pay commission/write-off associated expenses, and for other purposes the money is treated as share capital. That is, apart from these exceptions, it is treated the same as capital, i.e. money received for the nominal value of the shares. It does not say that you can only use the money for those exceptions.

    See the spoiler

    Spoiler:
    Show
    610Application of share premiumsE+W+S+N.I..This section has no associated Explanatory Notes
    (1)If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares must be transferred to an account called “the share premium account”..
    (2)Where, on issuing shares, a company has transferred a sum to the share premium account, it may use that sum to write off—.
    (a)the expenses of the issue of those shares;.
    (b)any commission paid on the issue of those shares..
    (3)The company may use the share premium account to pay up new shares to be allotted to members as fully paid bonus shares..
    (4)Subject to subsections (2) and (3), the provisions of the Companies Acts relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital..
    (5)This section has effect subject to—.
    section 611 (group reconstruction relief);
    section 612 (merger relief);
    section 614 (power to make further provisions by regulations).
    (6)In this Chapter “the issuing company” means the company issuing shares as mentioned in subsection (1) above.


    So unless we are using an exception, the money is treated as capital. What is the significance of this? Essentially, you can't distribute it to shareholders unless you do a reduction. The company CAN use it to buy stuff, this is not prohibited.

    It was probably a bit silly of me to even mention reductions, as this is not really a live issue on the facts of the question as there isn't really evidence that the shareholders want to distribute profits. It is more of a hypothetical question: if they wanted to distribute capital (i.e. the company didn't have enough distributable profits to cover a proposed dividend), then they'd need to do a reduction.

    RE: paying debts, see s643. The test is whether the company can pay its debts as they fall due: it isn't necessary that the company is able to pay the full debt immediately. For example, if £2,000 plus interest was due to be repaid each year for 10years, and the directors are confident that the company will be able to meet those payments from its earnings, they could make the solvency statement.
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    (Original post by jacketpotato)
    That's not what the Act says - it says that you can allott bonus shares/pay commission/write-off associated expenses, and for other purposes the money is treated as share capital. That is, apart from these exceptions, it is treated the same as capital, i.e. money received for the nominal value of the shares. It does not say that you can only use the money for those exceptions.

    See the spoiler

    Spoiler:
    Show
    610Application of share premiumsE+W+S+N.I..This section has no associated Explanatory Notes
    (1)If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares must be transferred to an account called “the share premium account”..
    (2)Where, on issuing shares, a company has transferred a sum to the share premium account, it may use that sum to write off—.
    (a)the expenses of the issue of those shares;.
    (b)any commission paid on the issue of those shares..
    (3)The company may use the share premium account to pay up new shares to be allotted to members as fully paid bonus shares..
    (4)Subject to subsections (2) and (3), the provisions of the Companies Acts relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital..
    (5)This section has effect subject to—.
    section 611 (group reconstruction relief);
    section 612 (merger relief);
    section 614 (power to make further provisions by regulations).
    (6)In this Chapter “the issuing company” means the company issuing shares as mentioned in subsection (1) above.


    So unless we are using an exception, the money is treated as capital. What is the significance of this? Essentially, you can't distribute it to shareholders unless you do a reduction. The company CAN use it to buy stuff, this is not prohibited.

    It was probably a bit silly of me to even mention reductions, as this is not really a live issue on the facts of the question as there isn't really evidence that the shareholders want to distribute profits. It is more of a hypothetical question: if they wanted to distribute capital (i.e. the company didn't have enough distributable profits to cover a proposed dividend), then they'd need to do a reduction.

    RE: paying debts, see s643. The test is whether the company can pay its debts as they fall due: it isn't necessary that the company is able to pay the full debt immediately. For example, if £2,000 plus interest was due to be repaid each year for 10years, and the directors are confident that the company will be able to meet those payments from its earnings, they could make the solvency statement.

    You're such a hero JP. I really don't know why all of this is baffling me so much - I think my head was all loopy when we did capital maintenance =(
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    (Original post by The_Goose)
    You're such a hero JP. I really don't know why all of this is baffling me so much - I think my head was all loopy when we did capital maintenance =(
    No worries, some bits of company law are quite technical. I completely ignored capital at uni and only really looked at it when on the LPC
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    (Original post by jacketpotato)
    No worries, some bits of company law are quite technical. I completely ignored capital at uni and only really looked at it when on the LPC
    don't have that option =( assessment is 5000 word problem question (this is just the first bit) worth 100% of grade :cry:
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    (Original post by The_Goose)
    don't have that option =( assessment is 5000 word problem question (this is just the first bit) worth 100% of grade :cry:
    Its probably for the best

    I would have got a first if I didn't drop capital, probably wasn't a good move
 
 
 
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