Business Law – Shares
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INTRODUCTION
As financial accountant of zafer plc I have been asked to advise the board of directors on certain matters listed below.
1. Differences between preference shares and redeemable shares.
2. Purposes for which share premium a/c and the revaluation reserve can be used.
3. Procedure, which must be satisfied before the shares, can be used.
And conditions, which must be satisfied before the premium to be paid.
4. Can the entire premium be written off to the share premium a/c?
5. Also the revised balance sheet extract after the shares are redeemed.
And the appropriate premium to be paid for share premium a/c.
I have done enough research on the company law books and also online
So Im glad to say that I could provide you the best resources that I have gathered all these days.
Before we move on to the main topics I would like to give you a brief idea about the shares and the shareholders. So what is a share? A share is the interest of the shareholder in the company measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants as provided by S14 companies act 1985.
A share does not make the holder an owner of the companys assets (Macaura v. Northern Assurance (1925)) but is gives you certain rights like dividends and voting rights. A company can issue the following types of shares
Ordinary/equity shares
Preference shares
Redeemable shares
Deferred/founders shares
Non-voting shares
So therefore the person who owns these types of shares is called a shareholder.
Now well move to the listed matters that we should discuss about.
Question (a)
Differences between 5% preference shares and redeemable preference shares
5% preference shares
Preference shares are shares, which carry rights in preference to other types of shares, which I have given above. The usual preferences given on the dividends and the return of capital on winding up of the company for the preference shareholders.
Dividend
A preference shareholder generally confers the right to receive a dividend up to a certain percentage, before any dividend is paid on the ordinary shares. Our preference shareholder in zafer plc is allowed to have a 5% fixed dividend on their shares. This fixed dividend will not fluctuate for any reason, although the company does not have to pay this dividend if it lacks the financial ability to do so. In general there are four types of preference shares, which are…
Cumulative preference
Non-cumulative
Participating preference shares
And convertible preference shares.
If they give preference to dividends or capital and if they carry a fixed rate on dividend, it is known that they are cumulative. Preference shares are usually cumulative and this means that if this years dividend wasnt paid, then it will be carried forward to next year. So that if the 5% for 2004 was missed, then preference shareholders will receive 10% in 2005 (assuming the zafer plc is in a position to pay the dividend!). The preference shareholder is only entitled to receive a dividend out of available profits out of which the dividend is declared payable. The power to declare preference dividends is usually given to the directors.
If shares are non-cumulative arrears dividend are not payable. In the case of Staples v. Eastern Photographic Materials Co. Ltd. (1896) it was expressly provided that shares will be preferential to dividend out of profits of each year, they will be non-cumulative.
If a preference share is a participating preference share then the owner of such a share has the right to participate in, or receive, additional dividends over and above the fixed percentage dividend discussed above. The additional dividend is usually paid in proportion to any ordinary dividend declared. These shares can participate equally with ordinary shares as soon as the latter have received a dividend of a specified amount.
Finally, preference shares may be convertible. If the shares are convertible then the shareholders have the option at some stage of converting them into ordinary shares.
CAPITAL
Usually articles state that preference shares have priority over the ordinary shares with respect to return of capital. If so preference shares have no rights to participate in the profitable assets. But if it doesnt state in that way preference shares and ordinary shares can equally share with respect to the return of capital, which they get from the company. And also the preference shares are entitled to participate in profitable assets.
Redeemable preference shares
Redeemable preference shares are those which under their contractual terms of issue this must be bought back by the company at a certain period of time. This means that it is a temporary membership with the company with repayment the nominal value of the share. Usually this membership will finish at the end of a fixed period or at the companys options this will depend on the terms of redemption of the shares. When the membership is finished the shares that are left are said to be redeemed which means they will be cancelled.
The money to redeem company redeemable shares usually will come either from their distributable profits or from issuing new share these new shares that will issued could be used to convert redeemable shares into ordinary shares or to roll over the redemption period.
On redemption out of the profits of the company, the company is required to establish a capital redemption