The diagram below illustrates the procedure that a company must follow in order to issue new shares. The remainder of this post sets out the steps in detail.
Step 1: Any cap on the number of shares that may be issued?
Before issuing new shares you must check the company’s articles for any cap or limit on the number of shares that may be issued. If this is to be exceeded, the cap must be removed or the limit increased.
Is there a cap?
A company incorporated under the Companies Act 1985 will originally have had an authorised share capital, which acted as a ceiling on the number of shares it could issue.
A typical share capital clause in the memorandum of association of a company incorporated under CA 1985 might look like this:
“The authorised share capital of the Company is £100 divided into 100 ordinary shares of £1 each.”
The authorised share capital of a company was the maximum amount of shares available for issue by the company. In the example above, the authorised share capital is 100 ordinary shares of £1 each. You will still see references to authorised share capital (ASC) in the articles of association of companies incorporated under CA 1985.
The requirement for a company to have an ASC no longer exists under CA 2006. Therefore, companies incorporated under CA 2006 will not have an authorised share capital and shareholders wishing to impose a cap to restrict the number of shares which such a company can issue will need to amend the articles of association (by special resolution) to include suitable provisions.
For companies which were incorporated under CA 1985, since 1 October 2009 (when the relevant CA 2006 provisions came fully into force), there has been a deemed restriction in their articles, derived from the authorised share capital with which they were registered under CA 1985 (see s.28(1) CA 2006 and Companies Act 2006 (Commencement No.8, Transitional Provisions and Savings) Order 2008 (SI 2008/2860), Schedule 2, paragraphs 42(1) and 42(2)(a)). Therefore, companies incorporated under CA 1985 will continue to have a ceiling on the number of shares that can be issued, unless such cap is removed from their articles.
Therefore, to see whether a cap exists a company’s memorandum, articles and any resolutions that have altered such documents should be checked.
How can the cap be removed?
For companies incorporated under CA 1985
Under s.121 CA 1985 companies could increase their authorised share capital by ordinary resolution.
To preserve the status quo which used to exist under s.121 CA 1985, SI 2008/2860, Schedule 2, paragraph 42(2)(b) provides that, for companies incorporated under CA 1985, shareholders wishing to remove or amend the deemed restriction from a company’s articles under CA 2006 may do so by ordinary resolution. This is despite the fact that removing such a deemed restriction involves changing the articles, which would normally require a special resolution under s.21(1) CA 2006.
Any such deemed restriction will also fall away as a consequence of the company adopting, wholesale, new articles (such as MA) which do not include provision for any cap (applying s.21(1) CA 2006).
Companies incorporated under CA 2006 will not have an authorised share capital. For such companies, therefore, there will be no bar to issuing shares under step 1 – the step will usually be satisfied. The only exception would be if the company has placed a provision in its articles limiting the number of shares that may be issued. If such a restriction exists, it can be removed, or the limit increased, by special resolution under s.21(1) CA 2006. Under s.617(2)(a) CA 2006, each time a company issues shares, its share capital increases automatically.
For step 1, you must therefore check:
- whether any resolutions to remove, impose or change any cap, or increase the share capital, have been passed, and ensure that you have up-to-date information (particularly checking the company’s constitution); and
- whether any shares have been issued by checking the register of members or the most recent confirmation statement filed at Companies House and any subsequent forms filed on allotments of shares (using Form SH01 under s.555 CA 2006))
If the company does not have a limit on its share capital or if there are sufficient unissued shares available within any cap for a proposed new issue, the company can proceed to step 2.
The Confirmation statement – ss.853A-853F CA 2006
Since July 2016, companies have been required to file an annual confirmation statement. This confirmation statement states (‘confirms’) that the company has filed all necessary returns in the previous 12 month period (e.g. changes to registered address, changes to directors or company secretary etc.). It also sets out any changes to share capital. In addition, under s.853F CA 2006, information relating to shareholdings (including information relating to the names of shareholders and number of shares held) must be provided along with the confirmation statement.
Before July 2016, similar functions were fulfilled by a company’s Annual Return (a filing which is now not required).
Step 2: Do the company’s directors need authority to allot?
Directors are responsible for the actual allotment of shares to a shareholder and they must resolve by board resolution to make an allotment. However, they may need to have the prior authority of the shareholders to be able to do this.
Section 549 CA 2006 provides that the directors of a company must not exercise any power of the company to allot shares in the company except in accordance with s.551 CA 2006 (authorisation by the company), or s.550 CA 2006 (private company with only one class of shares).
In private companies with only one class of share, s.550 CA 2006 provides that directors have the power to allot shares of that same class, unless they are prohibited from doing so by the company’s articles. This helps many smaller companies to simplify the process of issuing shares. In relation to companies incorporated under the CA 1985 only, SI 2008/2860, Schedule 2, paragraphs 43(1) and (2), provide that an ordinary resolution is required to authorise the directors to rely on s.550 CA 2006.
Otherwise, directors require authority under s.551(1) CA 2006, which provides that authority may be given by a provision in the company’s articles of association or by shareholder resolution. Under s.281(3), this means an ordinary resolution unless the articles require a higher majority. You would therefore need to check the latest version of the company’s articles and any resolutions that have been passed giving the directors authority, in order to establish whether further authority is required.
Authority to allot under s.551(1) CA 2006 can only be given subject to limits in terms of both time and number of shares (s.551(3)). This means that if the company has already granted its directors a s.551(1) CA 2006 authority, it must be checked to ensure it is still valid.
If a cap exists in the articles (see step 1 – e.g. where a company has not removed the cap transferred from the company’s authorised share capital in its memorandum), authority to allot can only be given up to the amount of the cap, which may need to be amended (as per paragraph 3.1(ii), to provide for the intended allotment) or removed altogether.
Authority to allot was also needed under CA 1985. It was given by ordinary resolution or set out in the articles.
You may see references to a “s.80 authority” in CA 1985 documents (i.e. an authority to allot under s.80 CA 1985).
Such an authority was required for private companies (even those with only one class of share). There was no equivalent position to s.550 CA 2006 mentioned above. Older companies wishing to take advantage of the flexibility provided by s.550 CA 2006 must resolve accordingly, as explained above.
Step 3: Must pre-emption rights be disapplied on allotment?
What does a ‘pre-emption right’ mean? It means the ‘right of first refusal’. New shares should be offered pro rata to existing shareholders before any new investor.
This is because, when a company allots shares to new shareholders, there is an effect on the proportionate ownership of the company held by the existing shareholders. Their ownership is diluted, and therefore their entitlement to dividends and voting power is also diluted.
Due to the potential dilution, s.561 CA 2006 contains pre-emption rights, which give protection to existing shareholders.
Consider the following example:
Example:
Blue Moon Limited has issued share capital of 100 ordinary shares of £1 each. The shares are held as follows:
Sally holds 20 shares, which equals 20% of the issued shares
Mary holds 80 shares, which equals 80% of the issued shares
100 shares issued in total (100%)Mary, on a poll vote, has the power to pass ordinary and special resolutions without Sally’s support. This means, for example, that Mary, acting alone, can change the constitution of Blue Moon Limited by altering its articles, and has control of the board of directors as she has the power to appoint and remove directors. In addition, Mary is entitled to larger dividends than Cathy.
If Blue Moon Limited now issues a further 100 ordinary shares of £1 each to a new shareholder, James, the position is as follows:
Sally holds 20 shares, which equals 10% of the issued shares
Mary holds 80 shares, which equals 40% of the issued shares
James holds 100 shares, which equals 50% of the issued shares
200 shares issued in total (100%)On a poll vote, each of the shareholders now needs the support of at least one other shareholder to be able to pass an ordinary or special resolution. The only control that any of them has is that Mary is able to block special resolutions and James is able to block both ordinary and special resolutions. In addition, both Mary and Sally are now entitled to lower levels of dividends.
Section 561 CA 2006 states as follows:
- A company must not allot equity securities to a person on any terms unless –
- it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company …
As a result, any new ‘equity securities’ (defined in s.560 CA 2006) must be offered to the existing shareholders of a company (holding ordinary shares), in proportion to their existing shareholdings, before they can be offered to anyone outside the company.
Under s.560(1) CA 2006, ‘equity securities’ are (i) ‘ordinary shares’ or (ii) rights to subscribe for, or convert securities into, ordinary shares. Take care, because this in turn leads to a special statutory definition of ‘ordinary shares’ for the purposes of s.560(1) CA 2006, the meaning of which is wider than we are accustomed to in everyday parlance. Shares ‘other than shares that as respects dividends and capital carry a right to participate only up to a specified amount’ are ‘ordinary’ for this purpose. This means that if a class of shares carries a right to receive dividends and, on a winding up, capital payments, and these rights are both capped, the shares will not fall within the definition of ‘equity securities’ and will not need to be offered pre-emptively. In every other case, the shares will fall within the definition of ‘equity securities’ and be subject to pre-emption rights under s.561 CA 2006.
Example:
XYZ Limited has a class of shares in issue which carry a right to receive a fixed preferential dividend of 5% of the nominal amount of the shares. In addition, the shares carry a right to share pari passu with the ordinary shareholders in any surplus assets on a winding up.
These shares are equity securities for the purpose of s.560(1) CA 2006 because even though the right to receive dividends on the shares is capped (at 5%) they carry an uncapped right to participate in capital payments on a winding up.
Can a company disapply pre-emption rights?
Yes. The procedure for giving effect to pre-emption rights (which can be found in s.562 CA 2006) can be lengthy and, especially for companies with numerous shareholders, complicated to carry out. On many occasions it will not be appropriate or desirable to follow the pre-emption rights procedure set out in CA 2006: for example where all shareholders agree that the company ought to bring in a new shareholder. In such a case, the company would want to disapply or exclude the pre-emption rights. This is permitted in CA 2006, with the permission of the company’s existing shareholders. There follows an explanation of the different means by which pre-emption rights can be dispensed with; in practice, companies usually use one of the first two methods on the list, depending on the source of the directors’ authority to allot the shares.
General disapplication of pre-emption rights:
A company may disapply pre-emption rights where the directors are generally authorised for the purposes of s.551 CA 2006 by passing a special resolution or by including the disapplication in its articles, both under s.570(1) CA 2006. This is not a permanent disapplication, but attaches to a particular, pre-existing s.551 authority. In practice, this is the most common means by which companies dispense with pre-emption rights on allotment.
Private companies with one class of share – disapplication by special resolution:
Section 569 CA 2006 provides for disapplication of pre-emption rights for private companies with only one class of share by special resolution. Such a disapplication presupposes the directors’ authority to allot the shares derives from s.550 CA 2006 and therefore can apply for so long as the company has in issue, and allots, shares of only one class.
Specific disapplication of pre-emption rights:
It is possible, although uncommon in practice, for a company to disapply pre-emption rights in relation to a specific allotment of shares (for example, in relation to shares being issued to a particular person or as consideration for a specific purpose) by passing a special resolution under s.571 CA 2006 (rather than s.570 CA 2006). The procedure for specific disapplication is more cumbersome than that for a general disapplication. Directors will need to provide the company’s shareholders with a written statement explaining (i) the reasons for the specific disapplication, and (ii) the amount to be paid to the company pursuant to the allotment along with justification for the amount, under s.571(6) CA 2006. A specific disapplication under s.571, like a general disapplication under s.570, attaches to a particular, pre-existing s.551 authority.
Private companies – exclusion of pre-emption rights in articles:
Section 567 CA 2006 allows private companies to exclude statutory pre-emption rights permanently, by way of a provision in its articles of association. However, companies rarely exclude pre-emption rights on a permanent basis because this would give existing shareholders no protection from dilution (there is no such provision in MA). In practice, only subsidiary companies commonly exclude statutory pre-emption provisions in their articles.
Private companies with one class of share – disapplication in articles:
Section 569 CA 2006 provides for disapplication of pre-emption rights for private companies with only one class of share under the articles. This is unusual in practice because it leaves existing shareholdings no protection from dilution.
The provisions of CA 2006 relating to pre-emption rights and their disapplication apply in the same way as described above to companies incorporated under CA 1985.
You may see references in CA 1985 documents to a ‘s.95 disapplication’ of pre-emption rights, which was the equivalent provision of s.570 CA 2006 under CA 1985 and (as under CA 2006) required a special resolution.
Step 4: Must new class rights be created for the shares?
When issuing new shares, a company may also wish to create a new class of shares, such as preference shares.
In order to create a new class of shares, it is necessary for the company, in addition to taking some or all of the steps set out above, to insert new provisions in its articles of association dealing with the rights attached to those new shares. An alteration to the articles of association, you will recall, requires a special resolution of the shareholders under s.21 CA 2006 (except if removing a cap transferred from a company’s authorised share capital in its memorandum).
Step 5: Directors must pass a board resolution to allot the shares
It is the responsibility of the directors to resolve by board resolution to allot new shares on behalf of the company. Any requirements for shareholder resolutions must be dealt with in a general meeting before the board meeting is held at which the new shares are allotted.
A general meeting will not be needed in advance of the board meeting if the company:
- has no limit in its constitution on the number of shares which can be issued by the company;
- does not require directors’ authorisation because the company is a private company with only one class of shares and there is no restriction in the company’s articles – s.550 CA 2006) or has already given the directors authority to allot shares;
- is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s.562 CA 2006 or has already disapplied s.561 CA 2006 or is a private company and has taken advantage of s.567 CA 2006; and
- has the relevant class rights in its articles of association.
Post-meeting matters
Having issued shares, the company must deal with post-meeting matters, as applicable:
If removing the cap on the number of shares that can be issued:
- file new articles (s.26(1) CA 2006);
- for CA 2006 companies, file resolution (SR to amend articles – s.29(1)(a) and s.30(1) CA 2006); and /or
- for CA 1985 companies, file OR to remove cap (SI 2008/2860, Schedule 2, paragraph 42(3); ss.29(1)(e) and s.30(1) CA 2006).
If granting directors’ authority to allot:
- Authority given under s.551 CA 2006: A company must file any OR granting directors authority to allot the shares at Companies House (s.551(9), s.29(1)(e) and s.30(1) CA 2006) within 15 days.
- Authority arising under s.550 CA 2006: A company incorporated under CA 1985 must file any OR granting directors of CA 1985 companies authority to rely on s.550 CA 2006 at Companies House (SI 2008/2860, Schedule 2, paragraph 43(3), s.29(1)(e) and s.30(1) CA 2006) within 15 days. No action is required on the part of a company incorporated under CA 2006.
If disapplying pre-emption rights:
A company must file the SR disapplying pre-emption rights at Companies House (s.29(1)(a) and s.30(1) CA 2006) within 15 days after it is passed.
If creating class rights:
A company must file the following at Companies House:
- SR amending articles of association (s.30(1) CA 2006) within 15 days after it is passed; and
- amended articles of association (s.26(1) CA 2006) within 15 days after it is passed.
Allotment of shares by board resolution:
A company must:
- file the prescribed form (Form SH01) at Companies House (under s.555(2) CA 2006) within one month of the allotment;
- file a statement of capital under s.555(3)(b) CA 2006;
- update its register of members (ss.112 and 113 CA 2006) within two months (s.554 CA 2006);
- send a share certificate to new members (s.769 CA 2006); and
- consider whether the position in respect of the company’s persons with significant control (‘PSC’) has changed – in which case it should update its PSC Register.