How to issue new shares in a private limited company

It is quite common for limited companies to issue additional shares after they have been incorporated. New shares are issued for many reasons; most usually because:

  • The company wishes to bring in a new “partner”.
  • The company wants to reward and retain key staff by awarding shares.
  • New capital is being raised in exchange for shares or equity.
  • A new issue will enable the purchase of another company or assets. The new shares being offered in exchange rather than cash.
  • A share issue can facilitate tax planning.

Directors’ authority: The shareholders of a limited company give the Directors the authority to issue new shares in one of two ways:

  • The authority is given tacitly: Most recently formed companies are incorporated using the Model Articles of Association set out in the Companies Act 2006. Unless they have been modified, the model Articles give the directors’ authority to issue shares, as long as;
    • The new shares are offered pro-rata to the existing shareholders, and
    • The new issue does not create a new class of shares.
  • The authority is given by passing a Special Resolution: Shareholders can pass a Special Resolution to amend the Articles of Association. A Special Resolution is one which is approved by a majority of 75% of the shareholders in general meeting. As long as the Company benefits, the resolution can sanction :
    • A new class of shares to be issued, with different rights
    • Shares to be issued on special terms, and
    • Shares to be issued to a new group of shareholders.

Consideration for shares:

  • Nominal Value:
    • Shares cannot be issued at a price lower than their nominal value. If the shares are worth less than their nominal value, either
      • the existing share capital will have to be restructured with a lower nominal value, or
      • a new class of shares will have to be issued
    • The company can issue the shares at a premium i.e. above the nominal value of the shares. The share premium will be accounted for in the share premium account in the Company’s books.
  • Deferred Consideration: The amount due on the shares does not have to be paid at the time of issue. Payment for the shares can be deferred and may only fall due in the event of liquidation.
  • Alternative forms of consideration: The consideration a company receives in exchange for shares does not have to be cash. For Example:
    • Shares can be issued in return for goods or assets.
    • Shares can be issued in return for the goodwill of another business
    • Shares can be issued in exchange for shares in another business.

Filing information with Companies House – form SH01:

  • Once the new share allotment has been completed, the company must file form SH01 with Companies House. The Company has 1 month, following the date of the allotment of new shares, to file the return. The following information has to be entered on the allotment:
    • Details of the shares allotted:
      • Class of Shares
      • Currency
      • Nominal Value of each share
      • Number of shares allotted
      • Amount paid per share, including any share premium.
      • Amount unpaid on each share.
    • Details of any non-cash consideration. A full description of the assets or goods received in return for the shares.
    • The new statement of capital

    Statutory Books:

    The Company’s statutory books will also have to be updated to reflect the new issue of shares:

    • The members register, detailing:
      • The name and address of the new members.
      • The number of shares held in each class, identified by its number
      • The amount paid or deemed paid to the company for the shares
      • The date on which the new members received their shares
    • The records of resolutions: A copy of any resolutions modifying the Articles of Association or authorising the issue of new shares, should be entered.

    Protection of Minority Shareholders:

    Directors proposing to issue new shares need to be aware of the following:

    • Shareholders’ pre-emption rights: Shares issued for cash have to be offered to existing shareholders first, on a pro-rata basis. If the shareholders refuse to take up the offer, the shares can be issued to a third party.[Section 561 Companies Act 2006]. Pre-emption rights exist to prevent the unfair dilution of a minority shareholder’s stake in a company. A company can pass a Special Resolution to disapply this right.
    • Shareholders agreements: Agreements between shareholders deal with matters not covered by a company’s Articles of Association. A shareholders agreement normally includes provisions designed to protect minority shareholders. An agreement can stop a company passing resolutions which lead to the potential dilution of a minority shareholder’s stake.

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