In Short
- Issuing new shares increases a company’s share capital and can change ownership percentages, potentially diluting existing shareholders’ rights.
- Directors must have authority under the Companies Act 2006 and act in the company’s best interests when issuing shares.
- Pre-emption rights protect existing shareholders from dilution, but these can be disapplied by special resolution or excluded in the articles of association.
Tips for Businesses
Before issuing new shares, confirm the directors have authority and review the company’s articles and shareholder rights. Set a fair issue price, document the board’s decision-making process, and comply with pre-emption procedures to avoid disputes and potential breaches of directors’ duties.
As a company director or shareholder in England and Wales, you may need to issue new shares to raise capital, bring in investors, or restructure ownership. The process of issuing new shares may seem straightforward, but you must consider several legal requirements to ensure you handle the process correctly. If not handled correctly, issuing new shares could lead to disputes with existing shareholders, breach of directors’ duties, and potential legal action. This article will examine what happens when a company issues new shares and the key considerations you must address.
Understanding Share Issues
When a company issues new shares, it creates additional shares in the company’s share capital and requires allocation to new or existing shareholders. This increases the total number of shares in circulation and typically changes the ownership percentages of existing shareholders.
The new shares will carry the same rights as existing shares unless specified otherwise in the company’s articles of association. The most common share class is ordinary shares, which commonly allow shareholders holding these shares to have certain voting rights, dividend entitlements, and capital rights. However, the company may choose to issue different classes of shares with varying rights attached.
When issuing new shares, you must carefully consider the legal requirements and existing shareholders’ interests. The process must comply with the Companies Act 2006 and the company’s constitutional documents.
Pre-emption Rights
Under the Companies Act 2006, existing shareholders have statutory pre-emption rights when a company issues new shares for cash consideration. These rights give existing shareholders the first opportunity to purchase new shares in proportion to their current shareholding. This prevents dilution of their ownership percentage without their consent.
However, companies can disapply pre-emption rights by passing a special resolution of the shareholders of the company. This special resolution would require a minimum of 75% of the voting shareholders to agree. Private companies can also exclude pre-emption rights entirely through provisions in their articles of association.
Pre-emption rights play a key role in protecting minority shareholders and prevent others from diluting their ownership against their wishes. If these rights apply, you must follow the correct procedures, including giving existing shareholders at least 14 days’ notice of their right to subscribe for new shares.
Continue reading this article below the formImpact on Existing Shareholders
Dilution of Ownership
When a company issues new shares to parties other than existing shareholders, it typically dilutes the ownership percentages of existing shareholders. For example, if you own 100 shares in a company that has 1,000 shares in issue (10% ownership), and the company issues 1,000 new shares to a new investor (totalling 2,000 shares in issue), your ownership drops from 10% to 5%.
This dilution affects more than just ownership percentages. Your voting power as a shareholder decreases proportionally, which may impact your ability to influence company decisions. This dilution also reduces your entitlement to dividends and any capital rights accordingly.
Financial Impact
The price at which a company issues new shares can significantly affect existing shareholders’ interests. If the company issues shares below market value without proper justification, existing shareholders may suffer economic harm. When issuing new shares, directors must set a fair price and may need an independent valuation for major allocations.
Directors’ Duties and Authority
Directors must have proper authority to issue shares, which typically comes from the company’s articles of association or a resolution passed by shareholders. The Companies Act 2006 requires shareholders to authorise directors to allot shares, and they must renew this authority periodically.
Directors must also comply with their fiduciary duties when issuing shares. This includes:
- acting in the company’s best interests;
- avoiding conflicts of interest; and
- not using their powers for improper purposes.
Common Scenarios for Share Issues
Raising Capital
The most common reason for issuing new shares is to raise capital for business purposes. This might include funding expansion, purchasing equipment, or providing working capital. Unlike debt financing, equity financing through share issues does not require regular interest payments or repayment of principal.
However, the company must use the funds it raises for legitimate business purposes. Using the proceeds for inappropriate purposes could expose directors to liability and potential legal action from shareholders.
Employee Share Schemes
Many companies issue shares to employees as part of incentive schemes. These arrangements can help attract and retain talent while aligning employee interests with company performance. However, employee share schemes must comply with employment law, tax regulations, and disclosure requirements under the Companies Act 2006.
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Key Takeaways
Issuing new shares is a significant decision that can fundamentally alter your company’s ownership structure and existing shareholders’ rights. The process requires compliance with statutory requirements, including pre-emption rights, directors’ authority to allot shares, and fiduciary duties. Key considerations include:
- must respect existing shareholders’ pre-emption rights or properly disapply them;
- directors need proper authority and must act in the company’s best interests; and
- the pricing and use of proceeds must be justified and documented.
If you need help understanding what happens when a company issues new 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
Under the Companies Act 2006, existing shareholders have statutory pre-emption rights for cash issues, but shareholders may disapply these rights by passing a special resolution, or the company may exclude them in its articles of association.
Not necessarily. Companies can issue different classes of shares with varying voting rights, dividend entitlements, or other privileges, provided the articles of association permit this.
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