Summary
- Only a limited company can issue shares, and a share issue creates new shares that bring money into the company.
- Before issuing shares, a company checks its articles and any pre-emption rights, and shareholders may need to approve the allotment by resolution.
- The company then registers the shareholder, issues a certificate and files an SH01, and a defective process can leave the allotment void.
- This article explains how a limited company issues shares for business owners in England and Wales.
- LegalVision’s business structuring lawyers advise company owners on waiving pre-emption rights, issuing a new class of shares and correcting a defective share issue.
Tips for Businesses
Hire a professional adviser to value the shares before agreeing a price. Ask the investor for a subscription application letter. Record any share premium and credit it to the share premium account. Tell Companies House when an investor holds more than 25% of the shares. Speak to a business structuring lawyer at LegalVision about completing the resolutions and filings for a share allotment.
On this page
- Can My Business Issue Shares?
- Share Issue vs Share Transfer
- Example: MeCo Limited
- Issuing New Shares
- Check your Company’s Articles of Association
- Pre-Emption Rights
- Payment for New Shares
- Share Premium Account
- Directors Approval
- Registering the Allotment
- Issuing Share Certificates
- Filing Requirements: SH01
- What Happens If You Issue Shares Without Following the Correct Process?
- Key Takeaways
- Frequently Asked Questions
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.
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, it 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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Example: MeCo Limited
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.
Two Offers
Having reviewed MeCo Limited’s accounts, your friend Roscoe and sister Darlene make separate offers:
- Share issue: Roscoe offers MeCo £20,000 for 50% ownership. The company receives the money and must issue new shares.
- Share transfer: Darlene offers you £10,000 for half your shares. You receive the money personally, and MeCo’s value remains unchanged.
Both transactions reduce your ownership from 100% to 50%. However, a share issue benefits the company, while a share transfer benefits the selling shareholder.
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
- the negotiating position of the parties.
Share valuation is rather complex, particularly in early-stage businesses. It is best practice to seek a professional advisor.
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.
Most small businesses incorporating as a company, especially those with a sole shareholder-director, choose to adopt the model articles of association. But of course, you can make amendments to this document to better reflect your business’ needs.
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 to allot these shares. However, you may need the shareholders to waive pre-emption rights (see below).
Pre-Emption Rights
As a director, you must comply with existing shareholders’ pre-emption rights, usually set out in your Articles. These rights allow shareholders to purchase new shares to maintain their ownership percentage. If you do not intend to offer them new shares, you must obtain a waiver of their rights.
Depending on what your Articles say, this waiver may require a special resolution of the shareholders (approval from the holders of 75% of the voting shares).
Payment for New Shares
Your shares will have a nominal value, and you cannot issue shares below this amount without the shares being partly paid.
The nominal value is initially derived from the price of each share of the same class when first issued by your company, which will be the value you recorded with Companies House. If you have ever undertaken a share split or a share consolidation, the nominal value of the shares will have changed.
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.
“Owners often treat a share issue as a quick exchange of money for shares and skip the approvals and filings. The problem rarely shows on the day. It surfaces years later, when a buyer or investor runs due diligence and finds records that do not match the real shareholdings.”
Share Premium Account
When you incorporated your company, MeCo Limited, you issued your shares at a nominal value of £1.00 (as 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 either convene a meeting or have all directors sign a written resolution. You should indicate in the meeting minutes or written resolution that all directors have approved the share allotment in accordance with the terms of the subscription letter.
Registering the Allotment
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 the shareholder 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 who owns more than 25% 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.
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.
Further, if the share issue resulted in any changes to persons with significant control (PSCs), you will need to file this with Companies House.
What Happens If You Issue Shares Without Following the Correct Process?
Issuing shares without the required approvals or complying with pre-emption rights can leave the allotment open to legal challenge. Affected shareholders may seek to reverse the allotment or claim compensation. Directors may also face personal liability for breaching their statutory duties.
Incorrect or late Companies House filings can create discrepancies in your share records, potentially causing problems during future investments or sales. Resolving these issues later can be costly and time-consuming.
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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.
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Frequently Asked Questions
What is a share issue?
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.
Are shares and equity the same?
In the context of who owns a company, you can use both terms interchangeably.
Can a defective share issue be fixed after the fact?
In many cases, yes – the board or shareholders can pass the correct resolutions retrospectively and re-file with Companies House. However, this depends on the specific defect, and some issues, like a shareholder’s pre-emption rights being ignored, may still give that shareholder grounds to bring a claim.
Who is responsible if shares are issued incorrectly?
The directors who approved the allotment are generally responsible, since it is their duty to follow the company’s articles and companies legislation. This is why it is important to check the correct process before issuing any new shares, rather than fixing problems afterwards.
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