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#3200 - Maintenance Of Share Capital - Business Law and Practice

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Company Law – Private Limited Companies

Maintenance of share capital

Principle of MSC

Capital must be maintained, as it is the fund to which the creditors look for payment of debts owed to them.

Paid up shares must not be returned to its shareholders,

and their liability in respect of capital not paid up on shares must not be reduced.

Unauthorised return of capital to shareholders is ultra vires.
Consequences:

  • Company cannot purchase their own shares

  • Company must not return capital to its members

  • Dividends must only be paid out of distributable profits and NOT out of capital.

S.658: a limited company must not generally purchase its own shares. It is offence committed by the company and all its officers. Penalties set out.

General principle: Cannot buy back from Shareholders wishing to give back their investment. SH must sell on to other investors. Capital must be available for creditors.
Exceptions

  1. Buying back shares – S.690

  2. Redeem its own shares – S.684 – 689

  3. Reduce share capital with consent of court – S.645– 651.

  4. Solvency statement – S.41 – 644

Exception 1:

Buying back shares by the company

9.5

[GURU notes for procedure]

  • S.690: grants directors the power to buy back shares. Check articles - is there anything restricting S.690?

  • S.706(b)(i): brought back shares are treated as cancelled. Shares cease to exist. i.e. return of money to the SH – the company received nothing of financial value in return. Shares immediately become worthless.

  • Director’s must consider whether it makes commercial sense to buy back shares – consider their duties [S.172]

Procedure of buy-back: (off-market shares) –

  1. Buy back out of PROFIT

  2. Buy back out of CAPITAL
Buy back out of profit

1. Checks:

  • S.690(1): articles of the company must not forbid this

  • S.691(1): shares must be fully paid; and

  • S.691(2): when shares are bought by the company, it must pay for them at the time of purchase

2. Funding can only pay for shares out of:

  • Distributable profits – S.692(2)(a)(i); or

  • Proceeds out of fresh issue of shares - S.692(2)(a)(ii)

3. Board Meeting

  • On reasonable notice

  • Quorum

  • Consider if a S.177 declaration of interest is required. If a director is selling his shares S.177(6)(b) exception can apply; Model Art. 14 will apply and director cannot vote

  • Board resolves & voting:

  1. decide method of finance [i.e. buyback from profit]

  2. approve draft terms of purchase contract subject to obtaining member’s approval [Mod.Art 3] – members will need to pass a SR to approve contract S.694.

  3. resolve to call GM / propose a written resolution

  • If directors resolve to call a GM to pass a special resolution Copy of proposed contract for purchase must be available for inspection by SH at least 15 days ending with meeting (S.696(2)(b) [therefore short notice is not allowed].

  • If Directors resolve to get approval by written resolution send the resolution to all eligible members [S.695(3) – member who holds shares which the resolution relates is not eligible member] together with copy of proposed contract - must be circulated with the written resolution [S.696(4)]. Special resolution is required to authorise terms of purchase contract with the contract.

WR will lapse in 28 days beginning with circulation date if not passed [SS.297(1)]

WR will be passed when the required majority [75% total voting shares] of eligible members have signified their agreement. [S.296(4)].

4. Hold General Meeting

  • Notice

  • Quorum

  • Pass the special resolution to authorise terms of purchase contract [S.694] (seller’s vote cannot count – otherwise the SR is not effective – S.695(3))

  • After meeting: keep minutes [10 years] and file the SR [within 15 days of GM/ WR – S.29 / 30 CA]

5. Board meeting

  • Notice / quorum / S.177

  • Board meeting resolves: “to enter into contract and authorise D to execute the contract”

  • Shares are cancelled

6. File a return to Companies House

  • SH03 – 28 working days of first purchase of shares – S.707

  • Form must state number of shares bought and nominal value of shares

  • SH06 – notice of cancellation of shares – accompanied by Statement of Capital within 28 days beginning with date on which shares are delivered to company. [S.708]

  • Update register of members - S.702 / S.1136
Buy back out of capital

1. Checks

  • Is there a restriction on S.690 [allows company to buy back shares] or S.709 [allows a private company to buy back using capital].

[Model articles are silent – so check special articles]

2. Board Meeting

  • Directors to resolve:

  1. Method of finance – i.e. buyback out of capital]

  2. Approve terms of draft S.714 Statement of Solvency [Directors must swear within 7 days] –

  3. To approve terms of the purchase contract – subject to obtaining Special Resolution (x2)

  • Call a GM / propose a Written resolution

  • Purchase contract has to be made available to members at least 15 days before GM and at the GM (if it is not – the special resolution will not be validly passed – S.696(5)]. If Written resolution is proposed – contract needs to be circulated with the WR.

3(a) Written Resolution

  • Circulate WR together with purchase contract, the Solvency Statement and Auditor Report.

  • Circulate WR to eligible members [seller is not eligible – S.695(2) & S.717(2)

  • Special Resolution to authorise terms of the purchase contract [S.694]

  • Special Resolution to approve payment out of capital [S.716]. This MUST be passed within one week of the S.714 statement of solvency [S.716]

  • If WR not passed within 28 days of circulation lapse [S.297(1)].

3(b) General Meeting

  • Notice / Quorum

  • Resolutions:

  1. Special resolution to authorise terms of purchase contract

  2. Special resolution to approve payment out of capital [S.716]

  • One week from Solvency Statement [S.716]

  • Solvency Statement and Auditor’s Report MUST be at the meeting [S.718]

  • Keep minutes – 10 years

  • Creditor’s and dissenting members right...
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