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