The terms "allotting shares" and "issuing shares" are often used interchangeably. In some cases, particularly when shares are created by a public company, there may be a difference. Share 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.
- Authorised capital
- Restrictions on the directors' powers
- Directors need authority to allot
- Pre-emptive rights for existing members
- Shares are allotted by the board
Issuing shares is a more complex procedure than many would expect. All the following matters may require attention:
Authorised capital (no longer a legal requirement but
still applicable to many companies)
Companies are no longer required to state their authorised share capital and this is a concept that is becoming obsolete. Any company registered before 1.10.2009, however. will have an authorised share capital provision in its memorandum of association, unless this has been removed. Such a 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 amend the articles. (See related topic: Authorised 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
If the company has only one class of shares, the directors have authority to allot shares of that class unless there is a restriction in the company's articles (sec550, CA 2006).
If the company has more than one class of shares, the directors need to be authorised by either a provision in the company's articles or by a special resolution (sec51, CA 2006).
Such authorisation must state the maximum amount of shares that can be allotted, and must limit the time during which the authorisation is valid, which cannot be more than 5 years.
Pre-emptive rights for existing members
Pre-emptive rights can arise from:
sec561, CA 2006 (statutory pre-emptive rights); or
provisions in the Company's articles or old-style memorandum and articles;
under a shareholders' agreement.
The statutory pre-emptive rights do not apply to:
issues of bonus shares (sec564); or
shares issued partly or wholly for non-cash consideration (sec565)
shares held under an employees' share scheme (sec566)
And they can be excluded by:
a provision in the company's articles (including where the articles contain an alternative pre-emption right), or
by passing a special resolution (sec569 - sec 571)
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).
Completing return of allotments. This is a form SH01 which must be sent to Companies House.
Completing the register of members, etc.(one of the statutory registers).
The allotment should be shown in the register of members (one of the statutory registers) and may also be entered in a register of allotments (a voluntary register kept by some companies).
Company Law Solutions provides an expert service for all your company law requirements, including advice about share allotments and transfers, and their website provides further practical advice on these matters..