How much must a company charge for its shares?
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Every share has a nominal (or par) value. It may be a £1 share or a 10p share,
or whatever. A company may not sell any share at a discount, i.e. may not sell
it for less than its nominal value: CA 1985, sec100. Except for this rule, the
amount a company charges for the shares it allots will primarily be a matter
for negotiation between the company and those buying the shares.
Take some typical circumstances.
(1) Three people set up a new company and agree to put £5,000 each in as share capital. The shares will probably be issued at their par value, i.e. each will get 5,000 £1 shares.
(2) Five years later if the company has been trading successfully and they have agreed to admit a fourth shareholder, the amount the newcomer will be expected to pay for the shares will depend on the current value of the existing company. This is always difficult to ascertain and will depend on the company's asset position, its profitability and the expectations for its future growth. If, say, an agreed valuation for the existing company was £60,000, the existing 15,000 shares would have a market value in the region of £4 per share, and they would negotiate around that figure as a price for the allotment of new shares for the new investor. If the shares are allotted at £4 per share, they will still be £1 shares, but issued at a premium of £3.
If a company issues shares at a premium it must set up a share premium account:
CA 1985, sec130. This is frequently misunderstood. It does not mean that the
amount of the premium has to be put in a separate bank account. It is simply
a balance sheet entry is subject to statutory rules which require this amount
to be treated in much the same way as share capital.
Note that the amount charged for the shares need not all be collected when
the shares are issued. In a private company, there are no requirements as to
the amount shares must be paid up. A PLC must receive at least one-quarter of
the nominal amount of the share and the whole of any premium: CA 1985, sec101(1).
Note also that shares may be allotted for consideration other than cash (see
related topic: Can shares be issued for assets
other than cash?)
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