Summary
- When a company issues new shares in England and Wales, existing shareholders have statutory pre-emption rights under the Companies Act 2006, giving them the first opportunity to purchase new shares in proportion to their current holding, with at least 14 days’ notice required before those rights can be exercised or disapplied.
- Issuing shares below market value or without proper authority can expose directors to liability for breach of fiduciary duty, and any dilution of existing shareholders’ ownership, voting rights and dividend entitlements must be handled in accordance with the company’s articles of association and shareholder resolutions.
- Pre-emption rights can be disapplied by a special resolution requiring at least 75% shareholder approval, or excluded entirely through the company’s articles, but the process must be documented correctly to avoid disputes with minority shareholders.
- This article is a plain-English guide to the legal requirements for issuing new shares in a company in England and Wales, written by LegalVision’s business lawyers.
- LegalVision specialises in advising clients on corporate transactions, share issuances and company law in the UK.
Tips for Businesses
Check your articles of association and any existing shareholder agreements before issuing new shares, as these may impose additional restrictions beyond the Companies Act requirements. Document the directors’ authority to allot shares and the basis for the share price. If you are disapplying pre-emption rights, ensure the special resolution is properly passed and recorded before proceeding.
Issuing new shares in England and Wales is governed by the Companies Act 2006, which sets out the rules on directors’ authority to allot shares, statutory pre-emption rights for existing shareholders, and the procedural requirements companies must follow. Companies House registers all share allotments, and the process sits within a framework designed to protect shareholders from dilution and directors from acting beyond their powers. 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.
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Impact 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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Filing Requirements After Issuing Shares
Once you issue new shares, you must notify Companies House within one month by filing a return of allotment using form SH01. This form records the number of shares allotted, the class of shares, the amount paid and any amount unpaid.
Missing this deadline is a criminal offence under the Companies Act 2006. In practice, Companies House may issue a late filing penalty and the company’s public record will remain inaccurate until you file.
You must also update your company’s register of members to reflect the new shareholders. This is a separate obligation from the Companies House filing and must be kept accurate at all times.
If you issued shares in exchange for non-cash consideration, such as services or assets, you must also describe that consideration on the SH01 form.
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, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Do existing shareholders always have the right to buy new shares first?
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.
Do new shares always have the same rights as existing shares?
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.
What authority do directors need to issue new shares?
Directors must have authority to allot shares, which comes from the company’s articles of association or a shareholder resolution. Under the Companies Act 2006, shareholders must authorise this power and it must be renewed periodically. Issuing shares without proper authority can expose directors to legal liability.
How does issuing new shares affect existing shareholders?
Issuing new shares to third parties dilutes existing shareholders’ ownership percentage, voting power and dividend entitlements proportionally. For example, a 10% shareholding can reduce to 5% if the company doubles its shares in issue. Pricing shares below market value without justification can cause additional financial harm to existing shareholders.
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