This article explains the law surrounding authorised share capital; allotment and cancellation of shares; types of shares; restructuring share capital and share transfers.
When a company is formed, the memorandum of association will state:
- the amount of share capital the company has, and;
- the division of the share capital into shares of a fixed sum each
The shareholders must agree to subscribe for some, or all, of the shares, at their nominal value. That is to say, they will subscribe one pound for each one pound share, or as the case may be.
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. Under the Companies Act 2006, authorised share capital is no longer limited. A company may have share capital in any sum.
Issued capital is the nominal value of the shares issued to shareholders. On the day a company is formed, the true value of one share with a nominal value of a one pound, will also be one pound. The company has cash of one pound and the allottee has a share with a nominal value of one pound. That is known as the par value.
The moment the company starts to trade it will either make money or lose money. If it makes money, the value of cash and other assets, like debts due to it, has increased, maybe a lot, maybe a little. So the shares are still, and will always be, nominally one pound shares by they are now worth something more. The nominal value is the same but the real value has increased. The difference is called the premium.
A company may issue shares only with authority of the shareholders. This requires certain paperwork and the submission of details to Companies House when all has been done.
The number of issued shares can be reduced. A reduction requires either an order of the Court, or a resolution approved by at least 75% of the shareholders.
A reduction is rare, and for specific reasons which are beyond the scope of this article. It may involve re-denomination of the shares into shares of a different par value, and / or a consolidation, or change based on some other technical formula.
You can read about the process for reduction of share capital.
Allotment is the process of issuing new shares to existing or new shareholders.
New shares are available to be allotted (the formal word for issued) at any time the shareholders so authorise. Allotments also require the proper process.
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.
If the directors are the shareholders (or if most are), then it is possible that a shareholders agreement may also give this power. However, if it does, it is also likely to be stated in the articles as well. The reason is that the shareholders agreement is a private document that only the current owners - not the future ones - can see. The articles are available for inspection by anyone.
It is lawful, and usual, for the shareholders to delegate advance authority to the directors to allot a specific number of shares. The circumstances when they may do this are set out as part of the resolution which gives the power. It is usually for a fixed period of weeks or months. The legal maximum is five years.
The company must deliver a copy of a resolution to Companies House within 15 days of the motion to do so being passed.
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. This exercise does not change the value of the company owned by each shareholder. It is an exercise most often undertaken by a public company for public relations purposes.