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As the sole owner of your own business, you may be hoping to grow by bringing in additional shareholders. Shares are a measure of ownership in a business. If you are thinking of issuing shares, you may be wondering what the process will be.
This article will first explain what kinds of business organisations can issue shares before explaining the difference between share issues and share transfers. It will then provide an overview of the process for issuing shares in your business.
Can My Business Issue Shares?
Only limited companies can issue shares. Therefore, unless you have incorporated your business as a company, your business will not be able to issue shares in the legal sense of the word.
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 a company.
Share Issue vs Share Transfer
A share is a form of property that a company can gift or sell to another person. However, before a company can transfer a share, they must first create it. Importantly, issuing shares and transferring them have different implications. So, it is vital to understand the distinction between them.
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MeCo Limited – Example
Suppose you own your own company, “MeCo Limited”. When you incorporated the company, you issued yourself 10,000 shares in exchange for giving the company £10,000 of your own money.
After a year’s hard work, the company has grown and is worth £20,000.
Two Offers
Having inspected your company’s accounts, your friend, Roscoe, and your sister, Darlene, approach you separately.
- Roscoe offers to give MeCo Limited £20,000 in exchange for equal ownership in the company; and
- Darlene offers to pay you £10,000 in exchange for half of MeCo’s shares.
Roscoe is effectively asking MeCo Limited to create new shares as payment for the company receiving £20,000. This is a share issue.
Darlene, on the other hand, wants to pay you directly. MeCo is still worth £10,000 regardless of whether you agree to the deal or not. This is a share transfer.
In both transactions, your ownership in the company has been “diluted”. However, Roscoe’s proposal directly benefits the company, whereas Darelens’ directly benefits you. Roscoe’s proposition will require you to issue new shares. Darlene’s does not — you can simply transfer them to her by signing a share transfer form.
For the rest of the article, we will consider share issues only.
Issuing New Shares
In practice, before your business can issue new shares, you will need to know how many shares to issue. You should base this figure on:
- the value of the investment;
- the value of your company; and
- negotiating parties.
Returning to the above example, Roscoe has made a compelling offer. You decide to accept it. Likewise, as sole director, you issue 10,000 new shares to reflect the fact his investment has doubled the value company.
Next, you need to know the process for allotting new shares.
Check your Company’s Articles of Association
Your company’s articles of association are the documents that govern how your company is to be managed. You will have filed these articles with Companies House when you incorporated.
If you are creating more shares of the same class, as a director, you will not need to obtain the consent of your company’s shareholders.
On the other hand, your business may issue shares of a different class. In that case, the shareholders will need to vote to approve the allotment through an ordinary resolution. If you are the sole shareholder-director, a simple statement recording this fact is sufficient. But where your company has more than one shareholder, you will need evidence that the shareholders voted on the resolution.
Pre-Emption Rights
As a director, you must ensure shareholders have exercised their pre-emption rights. This simply means that you have offered each existing shareholder the option to purchase additional stock to preserve their percentage of ownership in the company.
Payment for New Shares
Additionally, your shares will have a nominal value. Likewise, you cannot issue below this amount.
The nominal value is the price of each share of the same class when first issued by your company. For ordinary shares, this will be the value you recorded with Companies House.
Subject to your company’s articles, as a director, you can agree for the shareholder to pay the full amount later. However, this may cause certain accounting issues when filing your annual financial reports with Companies House.
Further, other parties can purchase shares in exchange for non-cash valuable assets, like a car or piece of machinery. However, there are certain legal and accounting implications to note.
Share Premium Account
When you incorporated your company, you issued your shares at a nominal value of £1.00 (and you received 10,000 shares in exchange for £10,000).
However, because your company grew, Roscoe had to effectively pay twice as much per share to get the same number of shares. In other words, he had to pay £2 per share. This £1 difference between the nominal and “market value” price is called the share premium.
You must record at what premium you issued the shares. Additionally, the amount must be credited to your share premium account to comply with share capital preservation laws.
Directors Approval
It is common practice for the person you are allotting shares to send a “subscription application letter.” This letter is a formal request to purchase shares in exchange for payment to the company.
If your company has more than one director to approve the allotment, you must convene a meeting. Likewise, record the fact that the directors agree to issue the shares according to the terms of the subscription letter. You should indicate in the meeting minutes that all directors have approved the share allotment.
Registering the Allotment
Additionally, English company law considers an individual to be the owner of a portion of a company’s shares at the point the company registers them as a member in their register of members. Therefore, you should promptly register this when you receive payment.
Person of Significant Control?
Since Roscoe will own 50% of the company’s shares, he is considered a person of significant control. This is anyone that owns 25% or more of a company’s shares.
Further, you will need to identify the level of their shares and voting rights within the following categories:
- over 25% up to (and including) 50%;
- more than 50% and less than 75%; or
- 75% or more.
Issuing Share Certificates
You will also need to issue share certificates to your new shareholder(s). In most cases, you would issue these within two months after allotting the shares.
Importantly, there is no required form that share certificates must take. You can even issue the certificate electronically (such as .pdf or .word).
At the least, the share certificates should specify the:
- shareholders’ name;
- number of shares issued;
- nominal value of the shares; and
- amount paid.
Filing Requirements – SH01
Finally, you will need to complete the SH01 Return of Allotment and Statement of Capital form (downloadable from Companies House) and file it within one month following the share issue.
If you had to pass an ordinary or special resolution, you must file a copy with Companies House.
If you had to subdivide or consolidate your shares, you will need to file an SH-02.
Further, if the share issue resulted in any changes to persons with significant control (PSCs), you will need to file this with Companies House.
Key Takeaways
Issuing new shares, also known as a share allotment, is necessary if you are raising equity finance. In exchange for giving money to the company, the investor receives company shares. You will need to check your articles of association to ensure you are authorised to issue new shares. Alternatively, the existing shareholders may need to authorise the allotment, either through an ordinary or special resolution. There are some additional filing requirements with Companies House.
If you need help raising equity, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have 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
A share issue is when someone gives your company money, and in exchange, your company gives them a share of ownership (or “equity”). A share issue is also known as a share allotment.
In the context of who owns a company, you can use both terms interchangeably.
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