Table of Contents
In Short
- Ordinary share capital includes all issued shares, excluding fixed-rate shares.
- It impacts tax reliefs, transparency requirements, and shareholder rights.
- Companies can raise or return funds by issuing or buying back shares.
Tips for Businesses
Ensure you understand how ordinary share capital affects your tax relief eligibility and reporting obligations. If you’re looking to raise funds or return value to shareholders, review your company’s Articles of Association and consult legal advice to navigate the share issuance or buyback process.
Ordinary share capital means the total amount of shares a company has issued at any time. This includes all classes of shares that a company has created and issued except for ‘fixed rate’ shares, being share capital, the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits. A company’s total ordinary share capital can change depending on whether they issue more shares, buy them back from shareholders or undertake a reduction of capital. When considering the value of the ordinary share capital of a company, it is essential to note that the value is calculated from the nominal value for each share. This article explains ordinary share capital, its impact on tax reliefs, regulatory disclosures, and how companies can issue or buy back shares.
Why Is Ordinary Share Capital Important?
Ordinary share capital plays a significant role as the law uses it as a benchmark when assessing a company’s tax position and determining eligibility for various tax reliefs. Shareholders’ holdings of a percentage of the share capital can affect their eligibility for tax reliefs like entrepreneurs’ relief. It can also trigger regulatory transparency requirements, such as the need for Persons with Significant Control (PSC) disclosures.
Ordinary share capital represents the equity shareholders invest in the business, helping companies and regulators distinguish between equity-raised and debt finance.
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What Is Included?
Ordinary share capital comprises all shares issued in the company at any time. This can include different class shares, such as employee and partly paid shares. However, with partly paid shares, only the shareholders’ value of shares that have been ‘called’ (paid in) is included in the share capital.
Notably, ‘fixed rate’ shares are not included in a company’s ordinary share capital. If the company becomes insolvent and is wound up, fixed-rate shares include the following:
- a right to a fixed dividend;
- no voting rights;
- no right to receive any other form of dividend; or
- no right to receive any capital.
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Why Should I Increase Share Capital?
A company can increase its ordinary share capital by issuing shares. Companies issue shares when they seek to raise money from investors. This could be for a specific business aim, such as scaling their business, developing a new product, or expanding into a new market. Issuing shares gives a company more flexibility when raising money than borrowing from banks or private credit providers.
Loans often have strict repayment plans, and lenders may require the company to register a charge against its assets as collateral in the event of non-payment. However, by issuing shares, the company can dictate the terms of any dividend payments to shareholders.
How Can I Increase Share Capital?
You can issue shares to increase your share capital. To issue shares, a company must follow a set procedure (provided by the company’s Articles of Association, Shareholder’s Agreement, if relevant, or the Companies Act 2006). If the company creates a new class of shares, there will be additional considerations and procedural hurdles.
Why Would I Reduce My Share Capital?
A company may look to reduce its ordinary share capital for several reasons, including:
- removing certain investors or consolidating shareholder power;
- preserving the value of shares;
- change its debt-to-equity ratio (gearing);
- return money to shareholders; or
- create value for remaining shareholders.
How Can I Decrease My Share Capital?
A company can decrease its ordinary share capital by buying back shares from shareholders. However, the law states that a company can only do this if it has sufficient distributable profits.
Similarly to issuing shares, there is a stringent legal process to follow when buying back shares.
Key Takeaway
Ordinary share capital refers to the total amount of shares a company has issued, excluding fixed-rate shares. It is key in determining a company’s tax position, shareholders’ eligibility for tax reliefs, and regulatory requirements such as PSC disclosures. Moreover, companies can increase their share capital by issuing shares to raise funds or reduce it by buying back shares. This is often to consolidate power or return value to shareholders.
If you have further questions regarding ordinary shares, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The nominal value is the amount each shareholder has paid into the company’s accounts in exchange for the shares unless a premium price has been paid in addition to the nominal value. This is a fixed value (usually up to £1 per share) and is separate from market value, calculated based on the company’s success and the perceived value of its shares.
Yes, a company can reduce its share capital by buying back shares. However, this is only if it has sufficient distributable profits and follows a strict legal process.
Fixed-rate shares are excluded from share capital because they only entitle holders to a fixed dividend. Additionally, they do not offer voting rights or a share in the company’s profits beyond the fixed rate.
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