This article is an introductory guide to share capital, which is an extensive topic. If ever you need legal advice, we shall be happy to oblige.
This article explains the basics of share capital. It will be useful reading for all shareholders and directors associated with companies incorporated in England, Wales or Scotland with a share capital, whether private or public. The article tells you what information must be delivered to Companies House; and explains the law surrounding authorised share capital, allotment and cancellation of shares; types of shares, restructuring share capital and share transfer.
For more on types on shares and share transfer, please see our article entitled “Owning shares” linked right.
Share capital and authorised capital
When a company is formed, it must be decided whether its members' liability will be limited by shares. The memorandum of association will state:
The amount of share capital the company will have, and;
The division of the share capital into shares of a fixed amount.
The members must agree to take some, or all, of the shares. The memorandum of association must show the names of the people (subscribers) who have agreed to take shares and the number of shares each will take.
Authorised capital is the amount of share capital stated in the memorandum of association.
Is there a maximum and minimum share capital?
For private limited companies, no. However, a public limited company must have an authorised share capital of at least £50,000 (and, if it is trading, issued capital of £50,000).
Can a company alter its authorised share capital?
A company can increase its authorised share capital by passing an ordinary resolution (unless its articles of association require a special or extraordinary resolution). A copy of the resolution - and notice of the increase on Form 123 - must reach Companies House within 15 days of being passed. No fee is payable to Companies House. If you want to increase share capital, Net Lawman supplies the required documents, forms and explanatory notes to guide you. Links are at the right of this article.
A company can decrease its authorised share capital by passing an ordinary resolution to cancel shares which have not been taken or agreed to be taken by any person. Notice of the cancellation, on Form 122, must reach Companies House within one month. No fee is payable to Companies House.
What is issued capital?
Issued capital is the value of the shares issued to shareholders. This means the nominal value of the shares rather than their actual worth. The amount of issued capital cannot exceed the amount of the authorised capital.
A private company need not issue all its capital at once, but a public limited company must have at least £50,000 of allotted share capital.
A company may increase its issued capital by allotting more shares but only up to the maximum allowed by its authorised capital. Allotments must only be done using the appropriate forms and documents.
Reducing issued capital
A company cannot normally reduce its issued capital because the shares are the personal property of the shareholder. However, there are exceptions, for example:
If a court order confirms a 'minute of reduction' following a special resolution of the company;
If shares are bought back in accordance with a redemption contract;
If the company's articles allow it to buy its own shares and the purchase is authorised by a special resolution.
Allotment of shares
Allotment' is the process by which people become members of a company.
More people may be admitted as members of the company and are allotted shares. However, the directors must not allot shares without the authority of the existing shareholders. The authority will either be stated in the company's articles of association or given to the directors by resolution passed at a general meeting of the company.
Types of resolution required to give authority to allot shares
Any public or private company with share capital may give authority for allotment of shares to its board of directors by ordinary resolution. Subject to an exception for private companies (noted in the following paragraph) authority must be for a fixed period which must not exceed five years and must set a limit on the amount of shares that the directors can allot under it. The company must deliver a copy of a resolution giving, varying, revoking or renewing an authority to allot shares to Companies House within 15 days of passing it.
A private company with share capital may pass an elective resolution, authorising the directors to allot shares for an indefinite period or for a fixed period longer than five years, though such a resolution must still set a limit on the amount of shares which the directors may allot. The company must deliver a copy of any elective resolution to Companies House within 15 days of passing it. A public company cannot pass an elective resolution.
Notifying Companies House
You must notify Companies House within one month of an allotment of shares using Form 88(2).
Nominal value and share premium
A company's authorised share capital is divided into shares of a nominal value. The real value of the shares may change over time, as the market fluctuates. However, their nominal value remains the same. When the company sells shares for more than their nominal value, the actual sum paid will be in two parts - the nominal value and a share premium. The share premium must be recorded separately in the company's financial records in a 'share premium account'.
Must shares be fully paid-up at the time of allotment?
No. Payment may be deferred until later. However, shares allotted in a public company must be paid-up to at least a quarter of their nominal value and the whole of any premium (except that this does not apply to shares allotted under an employees' share scheme, that is, a scheme for encouraging share ownership by employees, former employees and their families).
Bonus shares
If authorised by its articles, a company may use any undistributed profits, or any sum credited to the company’s ‘share premium account’ or ‘capital redemption reserve’ in order to finance an issue of wholly or partly paid up 'bonus' shares to the members in proportion to their existing holdings. The shareholders to whom the shares are issued pay nothing.
A company can also use a capitalisation of profits to credit partly paid shares with further amounts to make them paid up.
The allotment of bonus shares must be notified to Companies House on Form 88(2).
Pre-emption rights
Pre emption rights are the rights of existing members to be offered new shares by the company before the shares are offered elsewhere, for example, to a new member.
The memorandum or articles of a private company may exclude pre-emption rights; however, a public company's cannot.
What is paid-up capital, uncalled capital, reserve capital and share premium?
These terms are used to describe the make-up of a company's share capital;
Paid-up capital is the issued capital which has been fully or partly paid-up by the shareholders;
Uncalled capital is that part of the issued capital on which the company has not requested payment;
Reserve capital is that part of the share capital that the company has decided will only be called up if the company is being wound up;
Share premium is the excess paid above a share's nominal value.
For example, if a company issues 1,000 shares with a nominal value of £1 each, paid-up to 20% of their nominal value with a 10% reserve and a share premium of 50p, the capital is:
Paid-up capital
£200
(1,000 x £0.20)
Reserve capital
£100
(1,000 x £0.10)
Uncalled capital
£700
(1,000 x £0.70)
Share premium
£500
(1,000 x £0.50)
If by chance you find some error of law or fact in any Net Lawman information page, do please tell us. We should also welcome your suggestions for new subjects for information pages. These notes:
Do not provide a complete or authoritative statement of the law;
Do not constitute legal advice by Net Lawman;
Do not create a contractual relationship;
Do not form part of any other advice, whether paid or free.
