SGS 8 - Procedure to Allot and Issue New Shares

Question 1

DECISION TO ALLOT NEW SHARES

Answer 1

-

Question 2

STEP 1: Is there a cap on the number of shares which can be issued? ? How do you remove it?

**Companies Incorporated Pre 2006

Answer 2

• Check the company’s articles/constitution for any cap or limit on the number of shares that may be issued

Anything Incorporated under CA 1985 will have an authorised share capital (a cap on number of shares)

This is set out in its Memorandum of Association.

If there is a cap then the articles need to be amended

REMOVING THE CAP:

If issuing the proposed shared, would cause the cap to be exceeded, amend the articles through ordinary resolution (paragraph 42(2)(b) of Schedule 2 to the 8th Commencement Order)

OR OPTION II

S.21 CA 2006 - Adopting the wholesale, new articles (i.e. MA) which do not include provision for any cap.

NOTE: Where an ordinary resolution is passed in this particular context, a copy of the OR must be filed with Companies House (this is unusual for ORs)

NOTE 2: In an exam, be sure to check (1) Whether the company was incorporated pre-2006 and if so (2) whether the company has since adopted the Model Articles or amended its Articles to remove the cap, in which case no OR will be required.

Question 3

STEP 1: Is there a cap on the number of shares which can be issued? ? How do you remove it?

**CA 2006

Answer 3

• Check the company’s articles/constitution for any cap or limit on the number of shares that may be issued
• Companies that have adopted the Model Articles with no amendments will not have a cap in place.

IF THERE IS NO CAP/CAP HAS BEEN RAISED/REMOVED, briefly acknowledge it and move to STEP 2.

IF THERE IS A CAP (i.e. Model Articles were amended at an earlier stage to impose such a cap)

Need to amend articles by special resolution to raise or remove the cap CA 2006 s.21

Question 4

STEP 2: Do the Directors Have Authority to Allot?

Answer 4

Per section 549, the directors will not have authority unless:

• s.550 (private company with only one class of shares) or
• s.551 (authorisation by the company)

applies

Question 5

STEP 2: Section 550- Private Company with One Class of Shares

Answer 5

COMPANIES INCORPORATE UNDER CA 2006

The directors will automatically have authority to allot the shares under CA 2006 s.550 if it is a private company with only one class of share (i.e. only ordinary shares) and it is proposing to issue only shares in that class

** Ensure that the company’s articles do not prohibit them from allotting the shares

COMPANIES INCORPORATED UNDER CA 1985

Schedule 2, paragraphs 43(1) and (2) an ordinary resolution is required to authorise the directors to rely on s.550 CA 2006

Question 6

STEP 2: Section 551 - Authority to Allot Given by Sharehodlers

Answer 6

If the directors do not fall in the s.550 criteria, then, per section 551(1) CA 2006 its directors may only allot shares if authorised to do so by

• the company’s articles or
• by a shareholder resolution (an ordinary resolution (s.281(3)) unless the articles require a higher majority)

Note - where an OR is passed, this must be filed with the Companies House (s.551(9) + CA s.29(1). This must be done within 15 days s.30(1) and the relevant fees must be paid.

Authorisation under CA 06 s.551 must state the maximum amount of shares that the directors are being given authority to allot and the date on which that authorisation will expire per section 551(3)

• THEREFORE, IN AN EXAM , if you are told that shareholders passed an OR or amended articles to give authority, check
• whether the time limit has passed and/or
• whether the proposed allotment will exceed the maximum number of shares that the directors have existing authority to allot

Question 7

STEP 2: Can you revoke an existing s.551 authority? If so, how?

Answer 7

Yes, By passing an ordinary resolution under s. 551 (4)(b).

This applies even if the authority had been given in the articles - s. 551 (8)

Question 8

STEP 2: What is the position of the directors who allowed an allotment for cash without s. 551 authority?

Answer 8

Any director who knowingly and willfully contravenes s. 549 CA 2006, or permits or authorises a contravention of the section, commits a criminal offence and is liable to a fine - s. 549 (4) & (5)

Question 9

STEP 2: If shares are allotted to a person for cash without s. 551 authority, is the allotment valid?

Answer 9

Yes, under s.549(6) CA 2006, the allotment would still be valid and enforceable. so that person will be able to take the shares.

However, doing so would constitute a criminal offence and the directors who allowed the allotment would be liable to a fine under CA 06 S.549(4)+(5)

Question 10

On revocation of a s. 551 authority, will any subsisting dis-application of s. 561 PE rights be affected?

Answer 10

Yes

the s. 561 dis-application will no longer be valid - s. 570 (3)

Question 11

STEP 3: Must the pre-emption rights be disapplied on allotment?

Answer 11

s.561 CA 2006 contains pre-emption rights,

Under s.561 any new equity securities must be offered to the existing shareholders of a company (holding ordinary shares) in proportion to their existing shareholdings, before they can be offered to anyone outside the company.

NOTE ** EQUITY SECURITIES

Question 12

Deciding whether shares need to be offered pre-emptively

Step 1: 1. whether the shares are ‘equity securities’?

Answer 12

Under s.560(1)

‘equity securities are

i. ordinary shares or
ii. rights to subscribe for, or convert securities into, ordinary shares.

Ordinary shares are shares ‘other than’ shares that can receive only a fixed dividends and capital.