As part of our series, Guidance for Directors, please find below a quick summary outlining key legislation governing this area of Company Law and the process that the board of directors of private or unlisted public companies should go through in order to issue new shares in a company.
For the purposes of this note the focus is on private companies incorporated after 1 October 2009 allotting shares for par value.
Where there are several shareholders, different classes of shares, pre-emption rights, directors / employees subscribing for shares or any potentially contentious issues, it is advisable to take legal advice to ensure that the correct procedures are followed to allot and issue the new shares.
Overview of allotment regime
Firstly, there are statutory provisions regarding the allotment and issue of shares set out at Chapters 1-7 of Part 17 of the Companies Act 2006 (CA 2006).
There are two further documents which commonly contain provisions affecting the allotment and issue of shares, these are the company’s articles of association and shareholder agreements (where applicable).
1. Do the directors have authority to allot new shares
Whether the directors have authority to allot and how to obtain authority to allot from the shareholders may be different from company to company.
If the company has only one class of shares, then the directors have a general power under section 550 of CA 2006 to allot shares of that class (or to grant rights to subscribe for, or to convert any security into shares of that class) unless the company’s articles of association specifically restrict this.
In circumstances where the company has more than one class of shares (or will have after the allotment), the directors have a power to allot the shares under section 551 of CA 2006 if either:
- the articles of association include a power for the directors to do so, or
- the shareholders pass an ordinary resolution to authorise the directors to make the allotment.
A section 551 authority must comply with specific requirements, including the maximum nominal value to be allotted under the authority and the period of time that the authority is extended to – limited to five years maximum.
2. Statutory pre-emption rights on allotment
Where new shares are being issued for cash consideration, directors must first offer the new shares to existing shareholders as per the statutory requirements under section 561 of CA 2006.
There are some exceptions to the general rule on statutory pre-emption rights; namely, in relation to the allotment of bonus shares, the paid-up allotment of equity securities if wholly or partly paid up otherwise than in cash, or the allotment of equity securities to employees under an employees’ share scheme.
It is possible for the company to disapply or exclude statutory pre-emption rights by passing a special resolution of the shareholders or including an appropriate provision in its articles of association.
3. Contractual restrictions on allotment of shares
It is not unusual to see that the company’s articles of association have been amended firstly to exclude the statutory pre-emption right and secondly, to include a contractual pre-emption rights process for shareholders to follow.
It is important to check the company’s articles of association carefully as if the company allots a class of shares resulting in the company’s share capital increasing, it may be deemed to be a variation of the rights for this class of shares, in which case the directors should obtain class consent before making the allotment of shares.
Shareholders’ agreements can also include provisions that may affect the allotment of new shares. It is typical for shareholders’ agreements to prescribe that if the new shares are allotted to someone who is not already a shareholder in the company, then on allotment of the new shares the new shareholder must sign a deed of adherence to the shareholders’ agreement.
4. Subscription letter
Once the directors are clear on their powers relating to the allotment of new shares under points 1-3 above, then the directors can proceed to liaise with the proposed new shareholder (Applicant) regarding subscribing for the new shares.
There is no requirement for the Applicant to apply for shares in the company in writing, however this is the normal protocol and we would recommend that a subscription letter is sent to the Applicant to make an application for the new shares.
Where the Applicant is a director or employee in the company, then a share subscription deed is recommended which should include but is not limited to leaver provisions, restrictive covenants and the tax position.
5. Shareholder approval
If the directors have established that under points 2 or 3 above, authority from the shareholders is required before the allotment can be approved, then a general meeting will need to be convened to pass the requisite resolution (or a written resolution may be circulated to existing shareholders instead).
Where there is more than one class of shares in issue, class consents may be required in relation to the proposed allotment of shares, which would require a separate class meeting (or separate written resolution).
6. Board meeting to approve the allotment of new shares
The directors have received the subscription letter from the Applicant and the subscription monies, so what now?
The directors must hold a board meeting to approve the allotment of shares. In the board meeting, the directors will:
- approve the form of application received from the Applicant;
- authorise the allotment of new shares and set out details of the Applicant and the new shares being allotted;
- authorise the submission of form SH01 to Companies House (and if applicable, submit a return in relation to the Applicant becoming a person of significant control/relevant legal entity);
- authorise that the statutory books of the company are updated to reflect the new allotment to the Applicant;
- authorise the issue of share certificate(s) to the Applicant.
7. Post-allotment matters
The date on which the shares are allotted to the Applicant is the date on which the register of members is updated with the details of the allotment. It is therefore important to update the register of members (and if applicable, the register of persons with significant control) and to make sure that the statutory books accurately reflect the share position in the company.
After the statutory books are updated, the company must file the necessary forms at Companies House together with any special resolutions and send a share certificate(s) out to the Applicant.
In addition, details of the Applicant as the new shareholder must be included in the company’s next confirmation statement and included in the company’s accounts.
Once you have considered the above points, if you have any questions or would like help with the incorporation itself, please get in contact with me or anyone else within the Corporate Commercial team on 01256 320555.
Corporate & Commercial Solicitor
Please note that this article is meant as guidance only and shall not constitute legal advice to you or the board of directors of any company.