When Does My UK Company Need a Share Split?

A share split is a transaction that increases the number of shares a company has in issue without affecting the underlying ownership value of the existing shareholders. You may need to undertake a share split under certain circumstances, such as before:

• raising equity capital;
• implementing an employee share scheme or employee share option plan; or 
• transferring shares. 

This article will explain a share split and when to undertake this process.

What is a Share Split?

A share split, also known as a share division, is when you increase the number of shares in a company without issuing new shares. This process involves taking the company’s existing shares and splitting them to create a larger number without affecting the underlying value of the share capital. 

This sounds complex, but consider the following example. When you incorporated your company, you were the sole shareholder. Accordingly, you decided to issue yourself a single share. Today, the total net asset value of your company is £100,000. Because your company has only issued a single share, the value per share is £100,000. 

Suppose you want to raise a further £50,000 through a share issue (equity finance). The amount you wish to raise is half the value of the company’s existing net asset value. So you should issue half a share in exchange for the cash. But this is quite impractical for many reasons. 

To get around this, you can divide the existing share capital (which currently consists of a single share) into ten shares (or 100, 100,000 or 100m shares). Then, it is more straightforward to issue a proportionate number of shares that reflects the 50% increase in your company’s asset value. 

When Do Share Splits Occur?

As you can see, share splits make it easier for companies to deal with their shares for future transactions. We will now consider the three circumstances that often lead to share splits. 

Before a Share Issue

As in the above example, companies that wish to raise equity finance through a share issue need more preexisting share capital. As a result, the value per share is too high. Without a split, issuing new shares would not reflect the value of the new capital raised. For instance, it might over-dilute existing shareholders’ stakes. 

For example, suppose you are the sole shareholder of your company. Its net asset value is currently £100,000. You have found five investors, each prepared to inject £4,000 into your company, or £20,000. This represents 20% of the existing value, so you should issue 20% more shares. But if you only have ten shares, while you could issue 2 shares, each shareholder would have less than a share. Nor would it make sense to issue five shares to each investor, as that would mean that the new investors own 33% of the company despite only investing 20% of its value. 

Again, the best option is to subdivide the shares into a more manageable number. If you divide ten shares into 1000, you could issue 200 or 40 shares per investor. 

Before an ESS or ESOP

Your company may also require a share split before making offers under its Employee Share Scheme (ESS) or Employee Share Option Plan (ESOP). These schemes are a common way for startups to issue equity to their employees to incentivise them and align their interests with the company’s. Under an ESS or ESOP, you will grant an employee a certain number of shares or options to convert into shares in the future. 

When you make an offer under an ESOP to an employee, you must determine the number of shares or options you will grant to that employee in their offer letter. The number of options granted (equivalent to the number of shares they will receive when they exercise their options) will likely equal a minority percentage of the company. 

As such, you need to ensure that your company has enough shares to offer a certain number of options equivalent to a minority percentage of the company.

Before a Share Transfer 

Using our first example, say you just wanted to unlock some of the value you built in your company rather than raise additional equity financing. You may have a business associate prepared to pay you half the company’s value in exchange for owning half the company’s shares. With the single share issued, you cannot do this without a share split. 

Formalities for a Share Split

You must file forms with Companies House to lawfully split your existing shares. In many cases, you can file the necessary paperwork while executing the transaction, giving rise to the share split. An experienced corporate solicitor can advise you on the exact process. 

Key Takeaways 

A share split divides the existing shares in your company without affecting the company’s total share value. Share splits, such as an equity raise, are commonly used before transactions affecting a company’s share capital. 

If you need help with your startup, our experienced business 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. 

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