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As the sole shareholder and director for a private company, you may decide that it is time to enter the next stage of your business. Likewise, you may be interested in raising equity from an outside investor. Generally, an investor will wish to get a cut of your company’s growth in exchange for giving some money. This article will first describe the difference between a share issue and a share transfer and then explain the steps you need to take to issue new shares.
Share Issue vs Share Transfer
It is essential to understand the difference between a share issue and a share transfer, because both are common transactions but have different implications.
Let us say you have a company, YouCo Ltd. When you incorporated the company, you issued yourself 100 shares. The company is currently worth £10,000.
Consider two different scenarios:
(a) Your brother offers you £10,000 in exchange for equal ownership in YouCo Ltd; in exchange, your company issues new shares; and
(b) Your sister has asked to purchase 25% of your company; you transfer your sister 25 of your own shares to her, and she gives you £2,500.
The first is an example of a share issue — also called a “share allotment” — because new shares are created and your company will issue them (“an allotment”).
In the second, no new shares are created. Instead, you transfer ownership of shares already in existence to a different person.
In (a) the share issue, YouCo Ltd has become twice as valuable because your brother contributed £10,000 and, in exchange, you issued twice as many shares as were already in existence. However, in (b) the share transfer, the value of YouCo Ltd stayed the same because your sister paid you directly (not YouCo Ltd).
In both scenarios, your ownership in YouCo became “diluted”, but this dilution happened in two different ways.
For the rest of the article, we will consider share issues only.
How to Issue New Shares
Once you decide to issue new shares in exchange for cash or other assets, it is important to obtain a valuation from an accountant or banker. A professional can advise you concerning number of shares you need to allot and at what market price. Additionally, there is a formal process you must follow.
Check Your Company’s Articles of Association
First, check with your company’s articles of association to ensure that you have the authority to issue (“allot”) further shares. Articles of association are the documents that set out the rules of the company and how it is to be run.
If you have a single class of shares and you have adopted the model articles of association, which is the default option when you incorporated your company, you will not need to obtain the consent of your company’s shareholders.
If, on the other hand, you are issuing shares of a different class, you will need to obtain the permission of your shareholders. For most companies, such as those using the model articles, an ordinary resolution authorising you as the director to issue the new class of shares will be sufficient.
Pre-Emption Rights
As a director, you have an obligation to 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.
As an example, say YouCo Ltd has two shareholders and you are the only director:
- You — 100 shares
- Your brother — 100 shares
You intend to offer your friend 100 new shares in exchange for £10,000.
As your brother currently owns half the company, you must offer your brother the chance to preserve 50% ownership in the company. If he does not have enough cash or other valuable assets to pay for the shares, he will effectively have refused his right.
You also, of course, have the same right as a shareholder.
Payment for the New Shares
Importantly, you cannot issue your shares for any amount less than their nominal value. This is the price per share registered at Companies House. However, 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 you have to file your annual financial reports with Companies House.
Shares can be purchased in exchange for non-cash valuable assets, like a car or piece of machinery, but there are certain legal and accounting implications to note.
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Share Premium Account
If a share is issued in excess of its nominal amount, the share will said to be issued at a premium.
As an example, if you issue 100 shares with a nominal value of £0.10 for £10,000 (the market price), the share premium will be £99.90 per share. This premium must be credited to your share premium account to comply with share capital preservation laws.
Approval of Share Subscription
If you are the sole director, there is no practical need to record the fact that you have agreed to issue shares.
But if there are other directors, you should convene a board meeting and take minutes of the meeting. You should record the:
- name of the person or company to whom you are issuing shares;
- class of shares they are purchasing;
- number of shares;
- nominal price of the shares;
- price paid for the shares (if the shares are purchased at a premium); and
- method of payment for the shares (i.e. cheque or bank transfer).
A share subscription application letter is a formal request to purchase shares in a company. As a formality, the person to whom you are issuing the shares should send you this letter in writing (or via email).
You must also indicate in the minutes that all directors have approved the share allotment.
Registration of the Allotment
Under England and Wales company law, an individual will be deemed to be in ownership of the new shares at the point he is registered as a member of the company in the company’s register of members. Therefore, you must ensure that you update your company’s register.
Person of Significant Control?
If the person to whom you have issued your shares has acquired 25% or more of a stake in the company, you must also notify Companies House. You will need the following information:
- name;
- date of birth;
- nationality and country of residence;
- correspondence address – known as the ‘service address’;
- home address;
- the date they became a PSC of the company; and
- the date you entered them into your PSC register.
Additionally, you will be asked 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, usually within two months after you allotted the shares.
In general, share certificates should specify the:
- number and class of shares you have issued;
- nominal value of the shares;
- name of your company and its company number;
- amount that has been paid on the shares (if not yet fully paid up to the nominal value); and
- notice stating that no transfer of the shares can be registered without the production of the certificate(s).
If you are issuing multiple classes of shares, you must use a different share certificate for each class of share you are issuing.
Filing Requirements – SH01
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.
Likewise, you will need to the following information:
- the number of shares issued;
- their nominal value and aggregate nominal value — so if you issued 10 shares at £1 per share, the aggregate value is £10; and
- if any non-cash consideration was given for the share issue, you will need to specify what it was and how it was valued using a valuation report.
You will also need to update your statement of capital, including the:
- total number of shares in the company;
- aggregate nominal value of those shares; and
- aggregate amount (if any) unpaid on the total number of shares.
Additional Filing Requirements – SH01
If you had to pass an ordinary or special resolution, you will need to file a copy with Companies House, which is the public body that regulates companies in the UK.
Alternatively, if you had to subdivide or consolidate your shares, you will need to file an SH-02.
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 gets shares in the company. You will need to check your articles of association to ensure you are authorised to issue new shares, or if the existing shareholders will need to authorise the allotment, either through an ordinary or special resolution. You must ensure existing shareholders have the option to exercise their pre-emption rights to maintain the same proportion of ownership. After the shares are allotted, update your company’s registry of members. Send the SH-01 form to Companies House within two months.
If you need help with how to raise 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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