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Issuing New Limited Company Shares

There are many reasons for a Limited Company to issue new shares. Shares can be issued at the company formation stage, or they can be issued at a later stage. Companies issue shares at a later stage for many reasons such as funding growth, reducing liabilities, increasing ownership of staff, etc. In this article of the "Path of Education for New Contractors" series, we explore the key factors surrounding the issue of new shares at a later stage.

  • Key considerations for Issuing New Shares
  • Things to do before issuing new shares
  • Steps to issue shares

Key Considerations for issuing shares:

Reduction of Control: Issuing new shares can be a great source of capital; however you should keep in mind that if you issue new shares to others, you will be reducing your control on your company. If you are issuing new shares for money, you need to ensure that this is the best way to raise capital. You should also explore options like loans or overdraft facility from banks, borrowing against assets, and loans from existing Directors.

Example 1: If your company has 100 shares, and you own 50 shares, and another two owners in your company own 25 shares each. With 50 shares, you have a 50% ownership of the company. Let's say the company issues 100 additional shares and two new investors buy 50 shares each. In this scenario, your ownership stake will reduce to 25% from the earlier stake of 50%.

Authority of Directors: If a company has only one class of shares such as ordinary shares, Directors can issue shares without securing approval from shareholders. However, if the company has more than one class of shares, shareholder approval is needed before issuing shares. In addition, Directors can issue shares if there are no specific clauses in the Articles of Association that restrict them from doing so. Apart from the above, several other cases determine that Directors should get approval from shareholders before issuing shares.

Approval from Existing shareholders: As seen above, the ownership and control of the existing shareholders is reduced when new shares are issued. To protect the existing shareholders, the law provides them pre-emptive rights or the first right to any new issue of shares. If they have money available, the existing shareholders can buy the new shares, or choose to waive their right and allow the shares to be issued to new shareholders.

Articles of Association: Apart from the above three considerations, you should check the Articles of Association in detail for any other restrictions on issuance of new shares. Generally, the Articles of Association can be of great help in understanding the legal implications around issuing new shares.

Things to do before issuing new shares:

Determine the share class: Before issuing shares, you should determine the class of shares, such as ordinary shares or preference shares. You can decide if you want to create a new class depending on what rights you want to give to the new shareholders.

Valuation of shares: The valuation of existing shares helps in determining the number of shares to be issued. As the business would have grown from the time it was launched, typically, the new shares will be valued at a higher price than the original price. This means the new shareholders will have to purchase the newly-issued shares at a premium price.

Determine the number of shares to be issued: Once the shares have been valued, you can find out how many shares you want to issue depending on how much capital you need.

Example 2: Assuming the original share price of your share was £1 and it has now increased to £3 as per recent valuations. If you want to raise £6,000, you will have to issue 2,000 shares.

Decide the payment terms: Typically, you will want the shareholders to pay the money upfront in return of new shares. However, it is possible for you to issue some shares for which payment can be made at a later date.

Steps to issuing new shares:

Once you have completed the preparatory work for issuing shares, you need to take certain steps for completing the issue of shares.

  • Make an offer to shareholders: Your Limited Company should make an offer of shares to the new shareholders. Because you are a private Limited Company, the offer should be made in private, either orally or in writing.
  • Application Form: The new shareholders should submit an application form along with payment necessary for acquiring of shares. The application should include details like how many shares have they applied for and at what price.
  • Issue shares through a board resolution: You should call for a meeting of the Board of Directors, in which all Directors will review the application forms. If there are no objections, the Board should issue a resolution to issue new shares. The resolution will include details including acknowledgement of receiving applications and payment, details on any waiver of pre-emption rights and a statement confirming the issue of shares.
  • Issue share certificates: Once the shares have been supplied, the company should issue share certificates to the new shareholders. The share certificate is the main documentary evidence that the shares have been issued. The share certificate should include name and address of the shareholder, the number of shares, and price per share, and it should be signed by the Director. As per the Companies Act, it should not take longer than two months before share certificates are issued.
  • Inform Companies House: Once the share certificates are issued, you should send form SH01 to Companies House, which will include details about the revised share structure and the revised share capital amount.
  • Update the register of members: Register of members is the main documentary proof of the companys shareholding structure, indicating who owns how many shares. Legally, the deadline for updating the register of members is two months.
  • Include the revisions in the next Annual Returns: While you will be submitting form SH01 to the Companies House, the form only includes information on the number of shares issued and not the names of new shareholders. So when you file the next annual return with Companies House, you must include the revised shareholder details in full.
  • Show the revisions in companys accounts: It is important that the companys accounts statements reflect the issue of new shares. Typically, issue of new shares leads to an increase in the amount of share capital in the balance sheet.

Summary:

While issuing new shares, you need to ensure that you follow all the steps mentioned above to avoid any legal difficulties. Every step is important, right from the decision to issue new shares to updating the companys accounts upon completion of the issue. Accounts Direct offers company secretarial services, which can take care of all your correspondence with the Companies House, including correspondence related to the capital structure.

Further Reading