Share capital & dividends
Share capital rules govern how shares are issued and how value may lawfully leave the company. SQE1 tests allotment, pre-emption, the capital maintenance doctrine and the lawfulness of dividends.
What "Share capital & dividends" covers
- Directors of a private company with one class of shares may allot without further authority; otherwise authority is needed under s.551 CA 2006.
- Existing shareholders generally have statutory pre-emption rights on a proposed allotment of equity securities for cash (s.561), which may be disapplied by special resolution (ss.569-571).
- Capital maintenance means a company must not return capital to members except by permitted routes; it generally cannot acquire its own shares (s.658).
- A company may reduce its capital by special resolution supported by a solvency statement (private companies) or by special resolution confirmed by the court (s.641).
- A company may buy back its own shares out of distributable profits or a fresh issue, and a private company may buy back out of capital following the statutory procedure (ss.690-709).
- A dividend or other distribution may only be made out of accumulated realised profits (s.830); a public company must also satisfy the net asset test (s.831).
- A member who receives a distribution knowing it is unlawful is liable to repay it (s.847).
Key cases & statutes
The authorities and provisions most likely to matter for this subtopic:
How it's tested in SQE1
SQE1 uses single best answer questions: a short factual scenario, one precise question, and five options of which only one is the best answer on the law applied to the facts. For share capital & dividends, expect to be asked what the correct legal position is, what a party may or must do, or which outcome follows — with more than one option looking arguable. Reading the facts carefully and eliminating the near-misses is the skill that earns the mark.
Where candidates lose marks
- Confusing statutory pre-emption on a new allotment (s.561) with contractual pre-emption on transfer of existing shares in the articles.
- Treating cash in the bank as the measure for a lawful dividend — the test is accumulated realised profits, not available cash.
- Forgetting the solvency-statement reduction route in s.641 is available only to private companies; public companies must go to court.
Learn this subtopic in the course
A video lesson, notes and exam-style practice on share capital & dividends.
FAQ
Is share capital & dividends tested on SQE1?
Yes — share capital & dividends is part of the SQE1 Business Law and Practice syllabus (FLK1) and can appear in single best answer questions.
How is share capital & dividends examined in SQE1?
SQE1 tests it by application: you're given a realistic scenario and choose the single best answer from five options. The focus is on using the law correctly, not reciting it — knowing the leading authorities (s.550 CA 2006, s.551 CA 2006) helps.