Make changes to share capital in a limited company

Share capital is the total amount of shares that have been issued in a limited by shares company. You can change your company’s share capital in various ways, such as allotting new shares or cancelling existing shares. Any such changes must comply with the Companies Act 2006, the articles of association, and any shareholders’ agreement that may exist. 

How to change your company’s share capital

Under section 617 of the Companies Act 2006, a limited company can change its share capital in the following ways:

• Issuing and allotting new shares
• Reducing the share capital
• Subdividing or consolidating share capital
• Redenominating the shares

We explain each of these specified methods below:

Issuing and allotting new shares

Issuing and allotting new shares generally increases a company’s share capital. It is important to understand the difference between ordinary allotments and bonus issues of shares.

Ordinary allotment of shares

An ordinary issuance and allotment of shares occurs when a limited company creates new shares after incorporation and gives them to someone. This might be to new or existing shareholders as a means of raising additional capital, repaying borrowings, funding new projects, or even rewarding staff as part of an employee share scheme. 

Bonus issue of shares

A company may decide to issue extra shares, free of charge, to existing shareholders pro rata (in proportion) to their existing percentage of shareholdings. This is known as a bonus issue of shares. It’s also sometimes called a ‘scrip issue’ or ‘capitalisation issue’, because part of the company’s undistributed reserves or profits are capitalised and used to pay up the issue of the shares.

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An ordinary allotment of shares is different from a bonus issue of shares. While shares created by an ordinary allotment can be given to new and existing members, shares created by a bonus issue can only be distributed to existing shareholders. This must be done free of charge.

Procedure

Part 17, Chapter 2 of the Companies Act 2006 deals with the allotment of shares. The basic procedure requires the directors to pass a resolution to approve the share issuance. The shareholders may need to disapply their pre-emption rights before the directors can do this. This is usually carried out by a special resolution. Upon approval, the directors can enter the issuance into the company’s register of members. 

Within one month of the allotment, the directors must notify Companies House by filing a ‘return of allotment of shares’ (form SH01). This must include an up-to-date statement of capital reflecting the company’s issued capital following the changes.

The directors must also update the company’s statutory register of members as soon as possible and issue new share certificates within two months of the allotment. 

Failure to notify Companies House amounts to an offence committed by the company and “every officer of the company who is in default”. This can result in severe penalties for the company and individual officers.

Reduction of capital

A reduction of capital occurs when a company decreases its share capital, typically by cancelling shares, reducing their nominal value, or cancelling some or all of the share premium account.  

Depending on the method chosen, capital reduction may result in a decrease in the number of shares in the company, a reduction in the nominal value of existing shares, or a reduction in the share premium account. However, the company’s market value won’t generally change. 

Procedure

Part 17, Chapter 10 of the Companies Act 2006 deals with the reduction of share capital. There are two ways you can do this, depending on the type of company:

• By special resolution supported by a solvency statement of the directors – for private limited companies only.
• By special resolution with confirmation of the court – public companies must use this procedure.

Both routes require at least 75% of the eligible members’ votes to be in favour of the action.

Within 15 days of passing the resolution, the directors must file form SH19 with Companies House. They must also include a copy of the shareholders’ special resolution, a directors’ statement of solvency, and a directors’ compliance statement confirming that the solvency statement was made no more than 15 days before the date of the special resolution and was given to the members before the resolution was passed.

Consolidation and subdivision of share capital

According to section 618 of the Companies Act 2006, any limited company with share capital can:

“(a) sub-divide its shares, or any of them, into shares of a smaller nominal amount than its existing shares, or

(b) consolidate and divide all or any of its share capital into shares of a larger nominal amount than its existing shares.”

With a sub-division, the company divides some or all of its shares into more shares of a proportionally smaller nominal value. Whereas, a share consolidation will amalgamate some or all of the company’s issued shares into fewer shares of a higher nominal value. 

Procedure

As long as the articles of association or shareholders’ agreement do not prohibit the consolidation or subdivision of shares (or specify a different procedure), it is simply a matter of passing an ordinary resolution. 

Within one month of the consolidation or subdivision, the directors must notify Companies House by filing form SH02. This includes an up-to-date statement of capital reflecting the company’s issued capital following the changes. The directors must also update the statutory register of members and issue new share certificates. 

Share re-denominations

A share re-denomination (also known as re-denomination of share capital) is the conversion of company “shares from having a fixed nominal value in one currency to having a fixed nominal value in another currency” (section 622 of the Companies Act 2006).

Procedure

The main action needed to effect a re-denomination of share capital is to pass an ordinary resolution, subject to any restrictions or bespoke requirements in the company’s articles of association or shareholders’ agreement.

Section 622 of the Companies Act 2006 states that the conversion to the new currency “must be made at an appropriate spot rate of exchange specified in the resolution…” which must be either “a rate prevailing on a day specified in the resolution, or…a rate determined by taking the average of rates prevailing on each consecutive day of a period specified in the resolution.”

The re-denomination itself takes place “on the day on which the resolution is passed, or… on such later day as may be determined in accordance with the resolution.” However, if the re-denomination does not take effect at the end of the period of 28 days (beginning on the date on which it is passed), it will lapse.

Within one month of passing the resolution, the directors must file form SH14 to Companies House to give notice of a re-denomination of shares (section 625 of the Companies Act 2006).

Share re-denomination with reduction of capital

Section 626 of the Companies Act 2006 allows for the reduction of capital in connection with share re-denomination. The shareholders must pass a special resolution within three months of the re-denomination resolution.

The share capital reduction cannot exceed 10% of the nominal value of the company’s allotted share capital immediately after the reduction. Under section 628, the amount by which a company reduces its share capital must be transferred to a “re-denomination reserve.” This reserve may be applied by the company to pay up shares to be allotted to members as fully paid bonus shares.

Any capital reduction in connection with re-denomination does not require court approval or a solvency statement. However, Companies House must be notified within 15 days of the resolution being passed (section 627).

Share re-designation

Although this does not constitute a form of alteration of share capital under section 617, the re-designation of shares (also known as reclassification or renaming of shares) can nevertheless change the overall structure of share capital within a limited company.

Essentially, it sees shares being converted from one share class (for example, the Ordinary share class) to another share class (for example, the “A” Ordinary share class). 

Procedure

To re-designate shares, the company’s members must pass an ordinary resolution and submit form SH08 to Companies House. Altering the articles of association, which itself requires a special resolution, may also be necessary.

Section 630 of the Act requires that, in the absence of express provisions being given for variation of class rights in the company’s articles of association (which might result from the re-designation of shares), shareholders of at least 75% in nominal value of the issued shares of that class must provide written consent for variation of rights attached to their shares, or else a special resolution must be passed. Companies House should be notified using form SH10. 

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Please comment below if you have any questions about this post. You may also find our Issue of Shares Service and Full Company Secretary Service useful if you’re planning to increase your share capital or require support with the administrative side of things.