What are shares?
Incorporation Services Limited provides an expert service
for all your company formation and company law requirements, including advoce
about different classes of shares.
A company set up to run a business will usually have money (and perhaps other
assets) put into it by the shareholders in return for shares. E.g. A, B and
C set up a company and decide that they will each put in £1,000 as share capital.
The simplest way for this to be represented is for the company to issue 1,000
£1 ordinary shares to each of the three shareholders. The company's issued share
capital will then be £3,000 divided into 3,000 shares of £1 each. It is not
the only way. An alternative would be for the three shareholders to take one
share each and to lend the money to the company. (See Topic: How
many shares should a company have?)
Share capital
The capital of a UK company limited by shares has to be divided into shares of a fixed amount (usually £1). Because the company is a separate legal entity the company is regarded as selling its shares to the (prospective) shareholders, who pay for them in cash or other assets. Because the creditors of the company can usually only look to the company's assets for payment, share capital is locked into the company and can be returned to the members only subject to strict rules (maintenance of capital). The shareholders are the members of the company and are the owners of it.
Nature of shares
Shareholding is a complex system of joint ownership. The shareholders jointly own the company. At the same time a share is itself an item of property which (subject to the company's articles) can be transferred by sale or gift.
In return for investing in a company a shareholder gets a bundle of rights in the company which may vary according to the type of shares acquired. Most companies only have one class of shares (ordinary shares) but the law in the UK is extremely flexible and allows any classes of shares to be created. This is done by setting out the different rights attached to the various classes (usually in the company's articles). What rights are attached to the different classes of shares is essentially a matter for the company to determine. The main rights which usually attach to shares are:
To attend general meeting and vote
Typically shares carry one vote each but there may be nonvoting shares or shares
with multiple votes. Some shares may carry the right to vote only in particular
circumstances.
To a share of the company's profits
The distribution of profits is paid by means of a dividend of a certain amount
paid on each share. A dividend may be paid only if the company has made profits
and to the extent that it decides to distribute them. (See CA 1985, sec263-281)
To a final distribution on winding up
If the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages: (1) a return of capital; (2) distribution of surplus capital. Some shares may be given a priority as to one or both of these.
That the company be run lawfully
i.e. in accordance with the Companies Acts, the general law and the company's constitution.
In most circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the common law rule in Foss v Harbottle. This is a complex area beyond the scope of this database.
For legal definitions of shares, see: Borlands Trustee v. Steel Bros. [1901] 1 Ch 279 at p. 288; C.I.R. v. Crossman [1937] AC 26 at pp. 40-41, 51-52, 66.
Incorporation Services Limited provides an expert service
for all your company formation and company law requirements, including advoce
about different classes of shares.
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