The reduction of share capital is also reasonable according to the section 641 of the CA 2006. Therefore Mirza has the right to diminish the shareholder’s liability in respect of unpaid capital, by disbursing the deficient amount from the undistributable reserves.
In the case the company has the surplus capital it may repay its shareholders, primarily those holding preference securities, even if they contradict with this decision.
However the statutory procedure should be followed and every creditor who made a claim against the transaction, should be paid off as these two cases deprive creditors of funds committed to pay their debts in a winding up.
Furthermore, Mirza may cancel its paid-up capital if it experiences the irreversible loss of assets by following the identical procedure as in a winding up and complying with the rules of repayment of capital. (Case of Jupiter House Investments)
The reduction of share capital is also justifiable in relation to sub-division or consolidation of the shares, where existing shares can either be divided into a number of new shares with a lower nominal value, as for sub-division, or combined into new shares of commensurate nominal value, as for consolidation.
Moreover the use of both reserves provides company with the flexibility to acquire or redeem its own shares, the latter cases is discussed below.
The alteration of share capital is only valid if it is authorised by company’s articles, the ordinary or special resolution where required is passed at the general meeting, and the courts’ permission is acquired.
b) Explain the reasons for a public company purchasing or redeeming its own shares.
The acquisition or redemption of its own shares is one of the ways company may use its undistributable reserves, although the Act prevents from this procedure where the company does not have sufficient distributable profits.
Sum and substance of the prohibition to acquire or to redeem its own shares is that basically this is a reduction of share capital where the procedure would return the capital to the shareholders which they have paid for their shares according to the old case of Trevor v Whitworth (1887). In addition the dealing of the company in its own securities could create a false market in those shares. The existing and possible creditors of the company may be misled by its size. () Besides, the company cannot be a member of itself. Although the Companies Act 1981 which came into effect on the 15 July 1982 has established the change in interdiction of the process.
By law, if the articles permit, Mirza may acquire its own securities if it pays for them in full immediately on the purchase. This procedure also requires that the shares were fully reimbursed and a company will have at least one irredeemable share in issue.
Company can make a market and an off-market purchase of its own securities. The first case arises when company listed on the recognised stock exchange is authorised by ordinary resolution to make procurement through the exchange. It might be general or restricted to the acquisition of securities of a particular class or by appropriate conditions. What is more, it should declare the maximum number of shares to be purchased, the highest and lowest prices to be paid for them and is constricted by the authority’s expiry date. This kind of purchase gives an advantage of using overage cash expediently, e.g. by acquiring redeemable shares at a lower price than their redemption. Also it may permutate the company’s capital as by obtaining non-redeemable preference shares to reduce gearing (DeFreitas, J., Company law p.128). The Registrar should be provided with all necessary documentation within 15 days period.
The off-market purchase therefore necessitates to be approved by a special resolution where the purchase made is otherwise than on stock exchange or it is not a subject to a marketing arrangement on that purchase. And as Mirza is a public company, the expiry date of special resolution should be stated.
(http://www.companieshouse.gov.uk/about/gbhtml/gba6.shtml)
Another aspect when a company can acquire its own securities is if it is offered as an unequivocal gift, voluntary surrended instead of the sums owed to the company or in the exchange of the new shares for the existing ones of the same par value, where the old shares are fully paid. In the case where the member’s shares which were hold for some debt are sold, any surplus of the sum owed to the company should be returned to the shareholder. Although this procedure is subject to the statutory rules where the shareholder is given a lien notice first and only if the member fails to pay the debt within 14 days, company is able to sell one’s shares. Furthermore, a public company is restricted by law to make any charge on its own securities unless it is the partly paid shares.
Mirza may also acquire lucrative interest in fully paid securities held by its nominee who acquired them from a third party for the company without any financial assistance obtained from the company for the acquisition. (DeFreitas, J., Company law p.143) The latter statutory rule forbids UK public company from giving financial assistance by the way of gift or loan out of its assets to the person buying its shares if the borrower is not intended to return it, as this will reduce company’s capital. Although, the financial assistance by a public company may be given, subject to the ss. 678 and 679, where certain exemptions to the main rule are allowed.
As a substitute for borrowing a company may issue redeemable shares which will raise the capital for the eligible period of time and which can be bought back by the company on the date contracted.
In all of the cases mentioned above except the surrender of the shares, securities should be fully paid whereas a partly paid ones result the acquisition to become void. Once bought back the shares should be cancelled or can be hold as treasury securities where they are obtainable for resale or for transfer to employee share scheme. There is to mention, that this type of securities does not provide the company with the rights of voting, receiving of dividends or any other gain of distribution of the company’s assets. What is more, the total of treasury shares cannot at any time exceed ten per cent of the nominal value of issued capital. Hence the excess must be disposed or cancelled. Treasury shares may be obtained only from distributable profits and the excess of the primary cost of their purchase, if any, achieved on their resale should be transferred to the share premium account.
There are further advantages the company would gain from the purchase or redemption of its shares. In times of a high interest rates company benefits by issuing redeemable preference shares in the way that the repayments to the shareholders can be made only out of available profits. While in the case of borrowing money, company will be liable to pay interest whether or not it is making profit. Note that the latter securities should be attractive to the participating preference shareholders; hence a premium or another surplus should be granted together with the issue of those shares.
The objective of company’s management is to maximise return for the shareholders, thereby acquisition of own shares is favourable as it will increase the earnings per share together with the net asset value per share.
What is more, it facilitates the retention of company’s control and defends against takeovers by reducing the number of shareholders who are able to sell their shares.
Nowadays, when strong economies creates very competitive labour market it is hard to retain personnel. Thus company is able to repurchase the securities of its employees if they leave the corporation
In the case of deceased shareholder, where company’s shares are not listed company is able to find a buyer for these securities.
Another reason motivating company to acquire its own shares is that it obtains the power to buy out a dissident shareholder.
(Hicks, A. /Goo, S.H. Cases and materials on company law, p. 298)
In summary, the effect to the company’s performance of acquisition or redemption of its own shares is subject to its finance. Although there are many favourable sequences of this procedure, some of the outcomes of it might negotiable.
c) Assume that the directors wish to redeem all the redeemable shares for £15,000 (the redeemable shares were issued at a premium of £ 2,500) and for the purpose of the redemption issue 5,000 shares of £1 each for £ 6,500, what conditions must be satisfied before the premium to be paid by the company on the redemption issue of the shares can be written off to the share premium account?
When the redeemable securities are redeemed it must be cancelled, therefore its nominal value should be deducted from the share capital account.
In general, the source of premium to be paid by the company on redemption must be deducted from the profits that are available for distribution. In this case where the redeemable shares were originally issued at a premium of £2,500, the premium of the £5,000 payable on their redemption may be reimbursed out of the proceeds of a new share issue made for the purpose of the redemption, according to the s. 687 (4) of the CA2006. This corresponds up to the lesser amount in the value of the conglomeration of the premiums originally received by the company on the securities on their issue in the first place and the existing share premium account balance which also includes the sum of the premium on fresh securities issue. The lesser sum must be taken from the proceeds of the issue of new 5,000 shares and applied towards payment of the premium payable on redemption. Hence the premium may be debited to the share premium account subject to two conditions which are already satisfied:
- The shares being redeemed must be initially issued at a premium ;
- The redemption scheme includes a fresh issue of shares. However the freshly issued securities do not have to completely replace the securities being redeemed.
A new share issue also could be used to convert redeemable shares into ordinary shares.
The notice of redemption together with the statement of capital should be registered with the registrar within one month. The statement should note the entirety of shares of the company, par value of the securities, the rights, total number and nominal value of each class of the shares, finally the amount paid and unpaid on each security. Any inadequacy to this procedure makes the company and directors liable.
d) Can the entire premium be written off to the share premium account?
Subject to one of the ‘redemption or purchase out of capital’ rules stated in CA s. 709, a private company where the articles permit, is able to fund redemption out of capital if it fails to satisfy the cost from available reserves. In contradistinction, a public company is restricted by the rule in s.692 which forbids using other than distributable profits or earnings from the new issue of securities.
As aforementioned in report, the share premium account is one of the non-distributable capital reserves; it follows that any reduction in the latter should be replaced by a new contributed capital to preserve its creditors’ interests.
Therefore, the entire redemption premium of £ 5,000 payable to the shareholders cannot be written off to the share premium account, in respect that this transaction is not satisfied by the premium received of fresh issue of securities. Alternatively, this would contravene the law where the share premium account would be inadmissibly reduced.
The only way where the whole premium can be debited to the securities premium account is if it could be fully covered by the proceeds of premium payable to the company from the new issue of the shares.
e) Show the revised balance sheet after the shares are redeemed.
Revised Balance sheet of Mirza plc.
The proposed transaction will have several effects on the balance sheet of the company which will essentially result the decline in shareholders funds by £8,500.
The redemption of shares and issue of fresh securities will decrease cash by £15,000, although the latter deficit will be partially covered by the £6,500 income of fresh issue which will also increase the amount of ordinary shares by £ 5,000. Regarding to one of the rules mentioned in question C), the premium of £2,500 of the original issue is debited to the share premium account. Since Mirza will use its distributable profits to redeem the shares the non-distributable capital redemption reserve of £3,500 should be created to satisfy the reduction in share capital.
f) If Mirza plc wishes to redenominate the nominal value of some of its shares from sterling to euros, the steps it must take to effect the change.
A limited company can denominate its shares in any currency or have it in the commixture of currencies as for different classes of shares (CA 2006, s.542 (3)). If Mirza’s articles permits redenomination, the company is able to convert its sterling-denominated shares to euros by passing an ordinary resolution specifying the ‘spot rate’ - the price that Mirza expects to pay for euro in sterling. This should be the rate specified in the resolution or determined by taking the average of rates predominating of each consecutive day within a transitional period. The latter would be 28 days, after which the resolution becomes obsolete.
Therefore the calculation of new nominal value of each class should be determined following this procedure:
Primarily, we should take the sum of old nominal value of each class separately.
Secondly, the estimated amount should be converted into euros at the exchange rate specified in the resolution.
Eventually, the new estimated amount in euros should be divided by the number of shares in particular class to arrive at the nominal euro amount of each individual share.
The redenomination procedure should be then registered with the registrar within one month after the changes have been made. Therefore the notice should include the following:
the date on which resolution was passed together with the statement of capital, comprising the total number of shares of the company, their aggregate par value, the rights, amount and par value of the each class of shares, as well as paid up or any unpaid amount on each share.
If this procedure is not followed the company and the directors of the company who are in default is liable to a fine.
When the redenomination causes the reduction of share capital, in the case if company would want to convert all of its shares, the special resolution should be passed within three months of the resolution effecting the redenomination. The reduced amount of share capital, which cannot exceed the ten per cent of par value of the share capital, should be transferred to the ‘redenomination reserve’. The notice of reduction of capital, resolutions together with the statement of capital and directors’ statement confirming that the statutory ten per cent was not exceeded must be filed with the Registrar within fifteen days period. If the aforementioned statements are not provided within the statutory period, the reduction is regarded as inoperative. What is more, if the director’s statement is not presented to the Registrar the company and its directors may face a fine. (s. 627 (8)).
If redenomination conditions reduction in share capital, the affected amount should be transferred to the undistributable redenomination reserve. The reserve later may be applied for the issue of fully paid bonus shares.
Total words: 3,339
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