Issuing shares

Most small companies start, on incorporation, typically with 100 shares being allowed and perhaps just 1 or 2 of those shares being issued. After formation, further shares can generally be issued, in terms of standard procedure, quite easily by a company directors as long as they have the necessary authorisation to do so. This authorisation will either be detailed within the articles of association of the company or it will be given by way of the passing of an ordinary resolution in a meeting.  The real issues tend to arise as a company grows and control issues arise or further capital needs to be raised and these are fundamental reasons why additional rules about issuing of shares ought to be considered at the outset.

Pre-emption rights

It is important to note that even when the articles of association (or otherwise) allow the directors the right to issue shares, they do not necessarily have absolute rights over whom the shares are issued to. In accordance with The Companies Act 2006 (“the Act”), in the event there is an issue of shares in line with a cash payment, the current shareholders have first refusal. The 21 day time period is known as a statutory pre-emption right. This right may be negated by the articles of association or by the passing of a special resolution in which directors may propose in writing that the shares are either issued without the pre-emption rights or propose an alternative for a pre-determined purpose.

Share Price

The price of a share at the time of issue may be above the nominal value of the share but should not be less than the nominal value.

What about issuing shares not for cash ?

With a private company, this is entirely permissible under the Companies Act and can be used as a way of the company strengthening it’s assets without diminishing it’s cash reserves.  A common example would be to issue shares instead of paying cash when taking over another company

Bonus shares and employee share schemes

Tax considerations can also play a part in a decision to issue new shares. For example, in some cases, some shares, rather than all, may carry enhanced dividend rights, and the owners of those shares may not in every case want to take the dividend payment as it will be taxed, so instead they may perhaps opt to have new shares issued instead of a dividend. The advantage to the company, in principle is that funds are retained which would otherwise have been paid out, but this is a classic area where there may be potential disadvantages for minority shareholders whose shares would be diluted in this way.

Another option for issuing shares is setting up an Employee Share scheme. Aside from the formalities in terms of setting up such a scheme and obtaining existing shareholder approval, considerations relating to dilution of shares and the possibility of having a larger pool of shareholders, there are tax considerations to be considered. Advice should be taken on such schemes, both in terms of company law, employment law and tax law.

Financial Assistance

There are also a number of provisions governing financial assistance for share purchases. Although previously not allowed, under the Act there is no prohibition on private companies giving financial assistance themselves for the purpose of share acquisition, provided that assistance is not given to a company which is part of the same group of companies. With regard to public companies, they are generally not able to provide financial assistance for the purpose of share acquisition. However, as with most areas of law, there are some exceptions which will be dependent on a number of factors relating to assets and profits being met.

Share Classes

Companies are able to issue shares in a number of different classes, with each type of class having different rights. For example, ordinary shares are limited and generally do not have an extra rights or obligations, but may have different voting rights. This differs to preference shares, which normally include a condition that means that any applicable dividends are preferentially paid to these shareholders before those with ordinary shares or the right to return capital before other classes. Another type of share class is a redeemable share, and these shares are issued on the understanding that the shares will be redeemed on an agreed date or after a certain period of time.