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You may have come across the terms ‘share subdivision’ or ‘share consolidation’, but are unsure of what exactly they mean. For instance, if you consolidate your shares, does that mean your company becomes less valuable because fewer shares exist? Alternatively, is your company more valuable if you subdivide your shares? This article will explain how share subdivision and consolidation works, the legal implications, and some practical reasons you may want to consolidate or subdivide your share capital.
Understanding Your Share’s Nominal and Market Value
Overview
To understand how consolidation or subdivision works, you should first consider the difference between your share’s nominal and market value.
Because it can be a challenging concept, let us consider an example.
The point of your company’s creation is an example of when your company’s nominal value and market value is roughly the same in the sense that your company has £100,000 in cash. Therefore, if a buyer offered each of you £20,000 in exchange for all of your shares, you would be no worse off.
When Your Nominal Value and Market Value Differ
Suppose a year later, after all your company’s liabilities have been settled, you have £1m in assets.
This is because the market value of your company is worth more than your share capital. Read on to understand how this can occur.
Understanding the Law of Share Capital
Most companies are private companies limited by shares. This means that if your company cannot pay its debts, you will only be liable for the value of your shares at the point you acquired them.
Though your company is worth £1m, if it suddenly could not pay its debts, you would only lose your initial £20,000 because the value of your shares at the price they are fully paid up — i.e., £1 each — is £20,000.
Anything over this amount can be declared as profit, provided the directors of the company state they are justified in declaring a profit.
However, how does this relate to share capital subdivision or consolidation?
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Dividing and Consolidating Share Capital
Subdivision or consolidation of your company’s share capital is a way for you to increase or decrease the number of outstanding shares without altering the value of your share capital.
For instance, in the above example, though the nominal value of your shares is £1, if your company is worth roughly £1m, the premium amount on these shares would be 10x the nominal amount.
In other words, you would only be willing to sell each share for around £10, depending on if you could find a buyer.
This is called subdivision. At no point does the underlying value of the share capital change: it just creates more shares.
Reasons to Subdivide or Consolidate
Market Reasons
As above, we will continue to discuss why you might want to subdivide a share.
Say your company is valued at £100m and you wanted to sell some shares. The difference between a single share’s nominal and market values would be 1000x. Thus, if you wanted to sell some of your shares for £2,000, that would only be two shares under your current share capital.
However, a buyer may have a hard time selling these shares later. Therefore, you could subdivide the share capital to make the market value and nominal value closer to each other. This would improve the liquidity of each share.
Getting Rid of Unusual Amounts
In some cases, following a new issuance of shares, you may be left with an uneven number of shares, such as 1003 shares.
For convenience’s sake, you could subdivide the shares to eliminate those three additional shares.
Eliminating Very Small Shareholdings
There are occasions when you might want to reduce tiny amounts of shareholders’ shares, for instance, to preserve administrative costs.
However, you would need to obtain legal advice to ensure that you act in such a way as to preserve minority shareholders’ rights.
Key Takeaways
Your company’s share capital must be preserved, except in certain situations. For example, in some cases, you may want to increase the number of shares in circulation so that the market value of your shares more closely matches the nominal value. Likewise, you may find that the nominal and market value is too low to be effectively valuable and want to consolidate the shares without reducing or increasing the value of the share capital itself.
If you need help subdividing or consolidating your company’s shares, 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 at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A share subdivision increases the number of shares in existence without altering the value of the company’s share capital. For instance, suppose the company’s share capital was £100,000 and there were 100 shares. You could divide the number of shares by 10, and turn 100 into 1,000. The nominal value of each share would be 1/10th of their earlier price, but the share capital would not change.
This is the opposite of a share subdivision. Here, the number of shares decreases. If your company’s share capital is £1,000 but you have issued 100,000 shares, the nominal value would £0.01. You could consolidate 100,000 shares into 1,000 and increase the nominal value to £1.00.
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