How are shares issued (allotted)?

Incorporation Services Limited provides an expert service for all your company formation and company law requirements, including advice about share allotmants and transfers.

(The terms 'allot' and 'issue' are often used interchangeably. In some cases, particularly when shares are created by a public company, there may be a difference. Allotment, strictly, is the allocation of the right to certain shares to particular applicants for them. Such 'allottees' may be sent allotment letters (which may be renounceable in favour of others), and the actual issue of the shares occurs later. In most private companies allotment and issue will be the same process.)

A company may allot shares when it is first set up or at any time during its lifetime in order to raise share capital and/or introduce new shareholders.

Issuing shares is a more complex procedure than many would expect. All the following matters may require attention:

Authorised capital
The company may issue shares only up to the amount of its authorised (nominal) capital (the figure stated in the capital clause of the memorandum of association. If there is not sufficient authorised capital available, it will be necessary for the company to pass a resolution in general meeting to increase it. By CA 1985, sec121 the capital can be increased by an ordinary resolution provided the articles so permit. Table A, article 32 so permits. (See related topic: What is authorised (or nominal) capital?). When the resolution is passed a copy of it, a form G123 and the memorandum as altered must be registered at Companies House.

Restrictions on the directors powers
At common law the allotment of shares was a matter of management and so, subject to any restrictions in the company's articles, a matter for the board. There were examples of abuse by directors in the exercise of these powers, and statutory restrictions have been placed on them:

Directors need authority to allot
CA 1985, sec80: (1) The directors of a company shall not exercise any power of the company to allot relevant securities unless they are .... authorised to do so by-
(a) the company in general meeting, or
(b) the company's articles
(2) "relevant securities" means shares (other than subscribers' shares or those under an employee share scheme) or any right to subscribe for, or to convert any security into, shares.
(3) Authority under this section may be given for a particular exercise of the power or for its exercise generally, and may be unconditional or subject to conditions.
(4) The authority must state the maximum amount of relevant securities that may be allotted under it and the date on which it will expire which must be no more than 5 years from the date granted.
(8) A resolution to give, vary, revoke or renew such an authority may, notwithstanding that it alters the company's articles, be an ordinary resolution; but it is in any case subject to sec380 of this Act (copy to be forwarded to registrar within 15 days).
(10) Nothing in this section affects the validity of any allotment.

(By CA 1985, sec80A (1) A private company may elect (by elective resolution) that the directors may be given authority to allot for an indefinite period or for a fixed period which is longer than five years.)

Pre-emptive rights for existing members
CA 1985, sec89: Shares must be offered to existing members in proportion to their present holdings. The offer must be in writing and (sec90) the company must allow at least 21 days for the shareholder to take up the offer.

These pre-emptive rights do not apply if:
(a) the memorandum or articles exclude them or provide alternative provisions (CA 1985, sec91 - private companies only); or
(b) the company passes a wholly or partly special resolution to exclude them (CA 1985, sec95); or
(c) the shares are issued for non-cash consideration (CA 1985, sec89(4)).
(d) the shares are issued under an employees' share scheme.

The shares could also be offered to the members who then waive their rights to them.

Shares are allotted by the board
Having attended to the above matters, the board should resolve to allot the shares, stating the number and class of shares, the allottees, the price paid, when and whether for cash or other assets.

The secretary should then attend to:
Issuing share certificates to the allottees. These should be under seal if so required by the articles (Table A, article 6 - though since the 1989 Act a company need not have a seal. Some companies thus amend this provision in their articles). See related topic: What is a share certificate?

Completing return of allotments. This is a form (G88(2)) which must be sent to Companies House. If the shares are allotted wholly or partly for non-cash consideration there must also be lodged a copy of the contract under which they were issued or a form G88(3). In either case, the copy sent to Companies House must be stamped with payment of the appropriate stamp duty.

Completion of the register of members, etc. The allotment should be shown in the register of members (statutory) and may also be entered in a register of allotments (voluntary). If any director has an interest in the shares allotted s/he should give notice to the company and the interest should be recorded in the register of directors' interests.

A typical procedure might be:
Check the memorandum and articles to ascertain the authorised capital and any provisions restricting directors powers or imposing pre-emption rights different from those in section 89.

First board meeting
Meets to resolve to call general meeting.

General meeting
Passes the following resolutions:
(1) ordinary resolution to increase authorised capital
(2) ordinary resolution to authorise directors to allot or special resolution to authorise them to allot shares without applying the statutory pre-emptive rights

Second board meeting
Resolves to allot the shares.

Company secretary
Prepares share certificates and has the signed (and perhaps sealed) and sent to allottees. Allottee entitled to a share certificate within 2 months after date of allotment: s 185(1). A certificate is prima facie evidence of title to the shares (s 186) and, at common law, a company may be stopped from denying a certificate it has issued.

Records:
Minutes of board and general meetings
Allotments in the register of members (and possibly registers of allotments and directors' interests)

Sends to Companies House:
Copy of resolution to increase capital plus form G123 and memorandum (and articles) as altered.
Copy of resolution authorizing directors to allot.
Return of allotments (G88(2)) plus contract or G88(3) if non-cash consideration.

Incorporation Services Limited provides an expert service for all your company formation and company law requirements, including advice about share allotments and transfers.

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