Capital Maintenance – Payment of Dividends, Share Capital – ACCA Corporate and Business Law (LW) (ENG)
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Hi Mike,
First off, great lecture as always, so thanks!
Can you kindly give a little bit more info regarding the legality in giving shares at a discount? I don’t think I’ve understood it correctly as my firm is a plc and it gives employees shares at a 5% discount, surely that’s not illegal!
Haroon, I notice that you’re based in England. My initial reaction is that I have never come across such a situation! You say that your company, a plc, ‘gives employees shares at a 5% discount’
The only way that I can envisage this is where the company has a share capital where each share has a market value of, say, $3 and a nominal (face) value of $1. If your company is issuing shares to employees at a 5% discount on market price, we would have double entry of:
Dr Cash Account $2.85
Cr Share Capital Account $1.00
Cr Share Premium Account $1.85
Does this suggestion fit with the facts as you know them?
Hi Mike,
Correct I’m based in England, the firm is a US company that offers as part of its benefits, an employee share purchase scheme (Other companies do this too, though i’m not sure if they do so at a discount) in which employees can enroll into the share purchase scheme, from 1-10% of their salary and after 6 months that amount deducted is used to buy shares in the company at a discount. It is sanctioned and approved by the necessary legal bodies So offering employees shares at a discount as part of an agreement with them is possible?
Hi again Haroon
Your response does seem to fit with the idea that the purchase of the shares is at a discount on MARKET PRICE rather than on nominal value. Have I interpreted your response correctly?
(Sounds like a good company to work for (unless the Genius gets back in next year!))
Hi Mike, can’t respond to your latest message on this topic, but yes you’re right, as I progressed in the syllabus I realised my firm was offering shares at a discount to market price which is allowed
Yes, I see your point. However, it is the case frequently that directors are members of their respective companies. And who better to know of potential good news on the near horizon? And who makes the decisions about the form of a distribution to shareholders?
Am I cynical? Am I naive? Am I missing something here?
I don’t know about being able validly to generalise this but it seems to me that, on the face of it, it could well be that the directors declare a scrip dividend option in the circumstances that they foresee potential growth.
However, a further brief glance at your previous post – to prevent insider not-trading is a problem not confined to management. It could be any sort of insider.
And secondly, to receive a cash dividend and immediately reinvest in share acquisition is not automatically insider dealing. Only in the situation where a) you are an insider and b) you buy on the back of unpublished price-sensitive information – that combination would qualify as insider trading. But if you are an insider and you buy NOT on the strength of inside knowledge, then there’s no law broken
OK?
But surely, this optimism of directors about their company is widespread. Why declare any sort of dividend if their outlook for the company is bleak?
I really don’t know the definitive answer to your question and I seriously doubt that it would appear in any ACCA Law exam – so that’s a relief!
Owner-managers and directors owning shares are common, and perfectly OK in small and medium LTDs. But when we talk about share price, we mean large, quoted PLCs. Completely different beast, and I would not be outraged if Corporate Governance practices said employees who have a “significant likelihood to have access to insider information” were barred from owning a significant interest in the company – with maybe an exception for stock options.
But that’s not the case, it’s just me daydreaming. Indeed that’s not what LW/F4 is about. You know you are a brilliant lecturer when you make students think, and be curious, and not just rote-learn!
Well! I’m certainly happy to know that I’ve made you think but modesty deters me from wholly accepting your compliment.
But thank you for it anyway 🙂
In essence receiving a scrip dividend is like receiving a cash dividend and buying at market value…
BUT…
I’ve been following earlier lessons! What if I am an insider with reasons to believe the business will perform well in the future ? Maybe opting for the scrip dividend would not be considered insider dealing? Hmm.
I’ve done TX already and know cash dividends are immediately taxable. But what if you opt for shares instead? This, I’m also unsure.
That’s an interesting, and irresolvable conundrum! As an insider who already holds shares, I hear / become aware of information that suggests that the shares are going to rocket skywards, why am I not guilty of insider trading because I don’t sell my shares? Surely I am holding on to those shares with the benefit of inside knowledge and looking to make a profit from that inside knowledge.
Equally, where I don’t hold shares in a company but, as an insider, I hear devastating news about the company so I’m not tempted to buy any shares, why am I not guilty of using that privileged information to avoid making a loss.
As to the tax implications, you’ll need to post on the Ask ACCA Tax forum – sorry
Incidentally, should you be interested, the answer to the conundrums above is …. the offence is the offence of insider trading or insider dealing.
The offence is NOT ‘insider not-trading’ or ‘insider not-dealing’
OK?
Of course, you made a great point in the lectures about that. But it would be difficult to enforce, “insider refraining to buy/sell after learning about probable future bearish/bullish price action”… Preposterous 😀 Only thing I could think of is, forbidding people to hold interests in quoted plcs in which they hold senior management positions, like we do for auditors… That’s drastic. And would mean bye bye stock options and other ‘long-termist’ incentives for directors…
My previous comment, though, was more about: opting to receive dividends as shares instead of as cash. If I am an insider, with reason to believe shares will skyrocket, and I happen to receive a cash dividend, and use it to buy shares, that’s insider dealing for sure. But what if I receive my dividend in shares instead? Still insider dealing or not? I just received a dividend which happened to arrive right after I learned the sensitive info, and also happened to be in shares… Convenient?
Thanks a lot Mr Little
You’re welcome Asher