Private equity investment
Private equity investment is where a company seeks to bring in new outside investors by issuing new shares. Note that this is different from a transfer of existing shares. The procedure is called an allotment of shares. This is because there is first a letter from the proposed investor applying to buy the shares. The shares are then “allotted” or “allocated” to that shareholder. When the investor’s details are entered into the register of members they are issued with the shares and are shareholders. They then get a share certificate.
Here are 6 tips in dealing with an allotment of shares in private equity investment.
1. Private equity investment and Resolutions – Although share allotments might only require a board resolution make sure the Companies Act 2006 (CA 2006), related secondary legislation or the articles don’t require further resolutions.
2. Check Articles – For companies incorporated pre- 01 October 2009 check the articles in case there is an authorised share capital limit. For companies post CA 2006, you are required to follow the procedure under the CA 2006 and in your articles. Check that there are no restrictions on issuing shares.
3. Private equity investment and Financial Assistance – A private company can provide financial assistance for the purchase of its own shares. That means for example that a company can use its own shares as security for a loan for a shareholder to buy additional shares in that company.
4. Private equity investment and and Share Buy-back – Does a buy-back of shares make commercial sense for the company? Bought-back shares immediately become worthless once returned to the company, since s706(b)(i) CA 2006 treats bought-back shares as cancelled.
5. Private equity investment and Types of Shares – A company can create different classes of shares with varying rights attached to them. Consider the different types of shares i.e. ordinary, preference, debentures, and the various classes of ordinary shares i.e. class a,b,c ordinary shares.
6. Payment You need to indicate any payment for shares on the company accounts which you are required to file at Companies House. Note, payment can be cash or non-cash consideration. In accordance with the CA 2006 Section 386(3)(a) states that all accounting records must contain –
(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place
This means that details of any monies paid into the company and how that money is utilised must be provided in the accounts filed at Companies House. Failure to do so is a breach of the CA 2006.
Failure to comply with Section 386(3)(a) is an offence under Section 387 committed by every officer of the company deemed to be in default. Although, there is a defence a person guilty of an offence under this section is liable:
(a)on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);
(b)on summary conviction—
(i)in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);
(ii)in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months, or to a fine not exceeding the statutory maximum (or both).
Section 387(2) provides a defence where the officers of the company have failed to comply with 386(3)(a) where there is a justifiable risk to the company, if they were to comply.
Naturally these are only “tips” of the iceberg in dealing with private equity investment. If you want to set things up properly then you need specialist legal advice, particularly if you hope to secure institutional investment. If you have not followed proper statutory and procedural requirements for the share allocations to take place, your business might be viewed too high risk for investment. Whilst accountants normally deal with the numbers, solicitors normally deal with preparing the relevant documents.
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