How Can My Company Issue Shares?

You are an ambitious entrepreneur, and your company is experiencing rapid growth. You are considering issuing new shares to fuel further expansion and meet your funding needs. However, issuing shares can be complex, involving legal and regulatory requirements that must be navigated carefully. Failing to comply with these requirements could have severe consequences, including potential penalties or legal disputes. This article will guide you through the steps your company should take when issuing shares, ensuring compliance and protecting your business interests.

Only limited companies can issue shares. Therefore, you need to incorporate your business as a company to be able to issue shares. This is one of the reasons why the private limited company is the structure that most business owners choose to operate. Therefore, this article will only deal with issuing shares for businesses incorporated as private companies limited by shares.

Understanding Your Company’s Articles of Association

Before issuing new shares, you must thoroughly review your company’s articles of association. This document outlines the procedures and any restrictions or conditions governing share issuance. Familiarise yourself with these provisions to ensure compliance and avoid any potential breaches. 

Obtaining Board and Shareholder Approval

Once you have reviewed the articles, it is time to seek approval from your company’s board of directors. Convene a board meeting and pass a resolution detailing the specifics of the share issue, including the number of shares, share class (e.g., ordinary or preference), and issue price. Board resolutions held at a meeting are typically passed when a majority of directors vote in favour. Depending on your articles and shareholders agreement (if you have one), you may also require approval from existing shareholders through an ordinary resolution (simple majority) or a special resolution (75% majority). 

Shareholder approval is typically required for significant share issuances that could dilute existing shareholders’ stakes. Shareholder approval will also be necessary when issuing a new class of shares and you do not already have authority (such as when issuing your first class of preference shares when you only have ordinary shares currently).

Considering Pre-Emption Rights

In some cases, existing shareholders may have pre-emption rights, which entitle them to be offered new shares before they can be issued to outsiders. This right ensures that shareholders can maintain their proportional ownership in the company. Failing to respect these rights could lead to legal disputes or challenges from disgruntled shareholders. It is crucial to follow the proper procedures outlined in the articles when making a pre-emptive offer to existing shareholders.

Due Diligence Guide for Buying a UK Business

This guide will walk you through the due diligence process when purchasing a UK business.

Download Now

It is important to note that even if you do not have pre-emption rights in your articles of association, these rights may also exist as a default under the Companies Act. Disapplying these statutory rights requires a special resolution from shareholders (75%).

Updating Statutory Registers and Issuing Certificates

After successfully issuing the new shares, updating your company’s statutory registers, including the register of members and share allotments, is crucial. These registers must accurately reflect the current shareholders and their respective shareholdings. Maintaining accurate records is a legal requirement and vital for maintaining transparency. 

Filing Returns and Updating Financial Records

Finally, you must file the required return of allotment (SH01 form) with Companies House, providing the prescribed particulars of the share issue. This step is essential for maintaining regulatory compliance and updating Companies House records. 

Additionally, ensure that you update your company’s financial books and records to reflect the increase in share capital accurately. This may involve making entries for the share capital received and any share premium and updating the company’s balance sheet.

Example: Issuing New Shares

Let us consider a basic example of a company issuing new shares. ABC Ltd is a private limited company with an existing share capital of 100,000 ordinary shares of £1 each, all fully paid up. The company is experiencing rapid growth and needs additional funding to expand its operations.

After reviewing the company’s articles of association and obtaining the necessary approvals from the board of directors and shareholders, ABC Ltd issues 50,000 new ordinary shares for £2 per share.

Steps

Here are the steps ABC Ltd would need to follow:

1. convene a board meeting and pass a resolution to issue 50,000 new ordinary shares at £2 per share, subject to shareholder approval;
2. assuming that ABC Ltd has model articles, consider whether to offer the new shares to the existing shareholder base first or, if you already have an investor lined up, whether you want to be able to issue the new shares straight to the investor;
3. if you decide that you want to issue the new shares straight to the investor, call a general shareholders meeting or circulate a written resolution to shareholders and obtain a special resolution (75% majority) approving the waiver of their pre-emption rights under the Companies Act;
4. if you decide to offer the shares, provide the new shares to existing shareholders first, following any pre-emption rights outlined in the Articles or the Companies Act;
5. issue share certificates to the new shareholders and update the company’s register of members and share allotment register;
6. file a return of allotment (SH01 form) with Companies House, providing details of the new share issue; and
7. update the company’s financial records to reflect the increase in share capital (£50,000) and any share premium (£50,000, assuming the shares have a nominal value of £1 and were issued at a £1 premium).

By following these steps, ABC Ltd has successfully issued new shares, raised additional capital, and complied with the legal and regulatory requirements for share issuance.

Key Takeaways

Issuing new shares is critical for companies seeking growth and additional funding. However, the process involves several legal and regulatory requirements that must be carefully navigated. Failure to comply could result in severe consequences, including penalties or legal disputes.

To issue shares successfully, your company should:

• thoroughly review and follow the procedures outlined in your articles of association, the Companies Act and any shareholders agreement;
• obtain necessary approvals from the board of directors and, if required, existing shareholders; 
• consider and respect any pre-emption rights held by existing shareholders; 
• update statutory registers, issue share certificates, and maintain accurate records; and 
• file the required return of allotment with Companies House and update financial records accordingly.

If you require assistance navigating the complexities of issuing shares or have any other legal queries, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you can access unlimited access to lawyers 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