Allotment of Shares

Question 1

What is the nominal value of a share?

Answer 1

The minimum subscription or purchase price for a share - lowest amount an investor may pay to purchase the shares

Question 2

What is the premium on a share?

Answer 2

The amount above the nominal value that represents a profit the company makes when issuing a share

Question 3

What is the company’s share capital?

Answer 3

The total value of all issued shares

Under the maintenance of share capital doctrine, this share capital cannot be distributed to shareholders, it must be maintained in the business

Question 4

What is the procedure for allotting shares?

Answer 4

1. Is there a cap on the number of shares that can be issued?
2. Do directors need authority to allot shares?
3. Must pre-emption rights be disapplied on allotment?
4. Must new class rights be created for the shares?
5. Directors must pass a Board Resolution to allot the shares

Question 5

Step 1: is there a cap on the number of shares that can be issued?

Answer 5

• CA 1985 - default cap on number of shares, unless amended articles. To change the cap, ordinary resolution
• CA 2006 - no default cap, unless included in the Articles. If required, change by special resolution

Question 6

Step 2: do directors need authority to allot shares?

Answer 6

Private company with one class of shares in issue
- automatic authority to allot shares of the same class (unless prohibited by articles)

All other companies (e.g., private company with more than one class of shares)
- Must be granted authority to allot shares by Ordinary Resolution

Question 7

Step 3: must pre-emption rights be disapplied?

Answer 7

Must dis-apply pre-emption rights for equity securities
- must offer shares to existing shareholders pro-rata first (pre-emption rights)
- can dis-apply pre-emption rights by Special Resolution

If shares are not equity securities
- shares are capped both as to dividend and capital
- pre-emption rights do not apply

Question 8

What shares are NOT equity securities?

Answer 8

Class of shares with rights capped for both right to receive dividends and capital payment

• BOTH capped
• “fixed” = capped
• pro rata = no restrictions = equity securities

Question 9

Step 4: must new class rights be created for the shares?

Answer 9

New class of shares being created
- not already in Articles
- must amend Articles by Special Resolution

No new class of shares created
- class already used in Articles
- no need to amend the Articles

Question 10

Administrative requirements: what copies of resolutions must be sent to Companies House and by when?

Answer 10

Copies must be sent to Companies House within 15 days

• CA 1985: any ordinary resolution to remove cap and ordinary resolution to use s550
• Any s551 ordinary resolution granting directors authority to allot if passed
• All special resolutions regarding dis-application of pre-emption rights and/or amending articles
• amended articles sent to Companies House

Question 11

What is the exception where an ordinary resolution does need to be sent to Companies House?

Answer 11

Normally ordinary resolutions are not sent to Companies House

But the OR passed to grant directors authority to allot shares does need to be filed at Companies House

Allotment of new shares (s551) = OR filed at Companies House

Question 12

What company forms must be sent to Companies House?

Answer 12

• Return of allotment (Form SH01) and statement of capital within one month
• if PSC have changed

Question 13

When must the company registers be updated?

Answer 13

• Update the register of members within two months of allotment
• update PSC register if necessary

Question 14

When must share certificates be sent to new shareholders?

Answer 14

Share certificates must be prepared and sent to new shareholders within two months of allotment

Question 15

What are treasury shares?

Answer 15

• Shares that have been bought back by the company itself and are held by the company ‘in treasury’
• They are issued shares being held by the company in its own name and company can subsequently sell those shares out of treasury
• Although sale of treasury shares is a transfer (not issue), s561 pre-emption rights and s573 disapplication of pre-emption rights applies
• Company can cancel treasury shares at any time or transfer them to employee share scheme

Question 16

What are a company’s distributable profits?

Answer 16

• The company’s accumulated realised profits less its accumulated realised losses
• Dividends are only payable by a company if it has sufficient distributable profits

Question 17

Who can a private company offer its shares to?

Answer 17

Private company is prohibited from offering its shares to the public

It can only make:
- offers intended only for the person receiving them
- offers which are a ‘private concern’

Question 18

What are the two most common forms of restriction on the transfer of shares?

Answer 18

1. Directors’ power to refuse to register
   - MA: directors may refuse to register the transfer of shares
   - Under CA a company must give reasons if it refuses to register a transfer
2. Pre-emption clauses (rights of first refusal) on a transfer of shares
   - CA and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the Articles of a company

Question 19

How is a share transferred?

Answer 19

• A stock transfer form, which has to be signed by the transferor and submitted, with the share certificate to the new shareholder
• beneficial title to the shares passes on execution of the stock transfer form
• legal title passes on registration of the member as the owner of those shares in register of members by the company
• Company will send the shareholder a new share certificate in this name within two months
• Stamp duty: stock transfer form must be stamped before new owner can be registered

Question 20

How much stamp duty is payable on a share transfer and when does it apply?

Answer 20

• Stamp duty is payable by the buyer at 0.5% of consideration, rounded up to nearest £5
• No stamp duty payable where consideration is £1000 or less

Question 21

What must occur for the third party being transferred the shares to become legal owner of the shares?

Answer 21

The Stock Transfer Form is sent to the Stamp Office

Question 22

What must occur for the beneficial ownership of transfer of shares (and to comply with company law)?

Answer 22

• name of recipient is entered on Register of Members
• board resolution to approve the transfer
• company secretary files a Return on Transfer of Shares at Companies House after the transfer

Question 23

Can shareholders compel directors to recommend a dividend?

Answer 23

No, because only the directors have the power to recommend the payment of dividends

• dividends are only payable out of distributable profits

Question 24

What are the two types of dividend?

Answer 24

1. Final dividends - recommended by directors and declared by company by ordinary resolution of shareholders (but only directors have the power to recommend)
2. Interim dividends - company Articles normally give directors power to decide to pay interim dividends if company has sufficient distributable profits. These can be paid without need for ordinary resolution of shareholders

Question 25

You incorporated a private limited company for a client a couple of years ago. The company has unamended Model Articles and four existing shareholders, who own 50 ordinary shares each. The company is looking to raise further finance and the directors have decided to issue 100 Non-Participating 5% Preference Shares, for cash.

Who needs to authorise the allotment of the new preference shares in order to comply with the requirements of the Companies Act 2006?

Answer 25

• The shareholders must approve the rights attaching to the new shares and give directors authority to allot them

These are non-participating preference shares = they have fixed income rights
- do not need to dis-apply pre-emption rights
- this means directors can allot them

Question 26

What are preference shares?

Answer 26

Preference shares may give a holder ‘preference’ as to payment of dividend or return of capital on a winding up

Rights of cumulative preference share holder:
- the preference shareholders will be entitled to any missed dividends payable as well as any current dividend

Cumulative preference share:
- if the dividend is not paid it will accumulate

Question 27

What is the difference between borrowing and issuing shares (tax purposes)?

Answer 27

The interest payable on the loan by the company is tax deductible, but the payment of dividends to shareholders is not
- Dividends are paid out of profits after a company has paid its corporation tax