What is share capital?
All companies limited by shares must assign a nominal value to each of its shares upon incorporation, e.g. £1 or £0.01. This nominal value represents the ‘limited liability’ of company members; it denotes the sum that shareholders must pay in respect of each share if the company is wound up. The total sum of shares at the nominal value is known as the share capital.
How can share capital be changed?
According to section 617 of the Companies Act 2006, there are a limited number of ways in which a limited company is allowed to alter its share capital:
- Allotting new shares
- Reducing share capital
- Sub-dividing or consolidating share capital
- Redenomination of shares
- Reconverting stock into shares
We will take a look at each of these specified methods below.
Issuing (or allotting) new shares generally has the effect of increasing the company’s share capital. It is important to understand the difference between ordinary allotments and bonus issues.
An ordinary allotment of shares is where a limited company issues new shares following initial company formation. These shares may subsequently be sold or given to existing or new shareholders, to raise additional capital from investors, repay borrowings, fund new projects or reward employees, etc.
A company may decide to issue extra shares, free of charge, to existing shareholders in the same proportion as their existing holding. This is known as a bonus issue of shares (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).
An ordinary allotment of shares is different from a bonus issue of shares. Whilst shares created by an ordinary allotment can be either sold or given away to both existing shareholders or new shareholders, shares created by a bonus issue can only be distributed to existing shareholders and must be done free of charge.
Part 17, Chapter 2 of the Companies Act 2006 deals with the allotment of shares. The basic procedure consists of passing an ordinary resolution. An ordinary resolution requires a ‘simple majority’ – which means that more than 50% of the votes cast are in favour of the resolution. It requires a vote to be taken as: a general meeting of shareholders; a board meeting of directors; or by written resolution.
Form SH01 must be filed with Companies House within one month of the allotment (s. 555) to provide notice of the procedure having taken place. A statement of capital must also be filled out to reflect the company’s issued capital following the changes. The register of members needs to be updated and new share certificates should be issued within two months.
Failure to notify Companies House amounts to an offence being committed by the company and “every officer of the company who is in default” – which can result in penalties.
Reduction of capital
This is a way of decreasing a company’s share capital through a number of means, such as share cancellations or share repurchases (also called buybacks). The result of capital reduction is that the number of shares in the company will decrease by the reduction amount. However, the company’s market value won’t change — there will simply be fewer shares available to trade.
Reduction of share capital is dealt with in Part 17, Chapter 10 of the Companies Act 2006. There are two ways this can be done, depending on the type of company:
- By special resolution with confirmation of the court — this route has to be taken by public limited companies.
- By special resolution supported by a solvency statement of the directors — this route is for private limited companies only.
Either route needs a resolution by at least 75% of the eligible members of the company.
Within 15 days of passing the resolution, Form SH19 needs to be filed with Companies House, along with: a copy of the shareholders’ special resolution, a directors’ statement of solvency, and a directors’ compliance statement, stating 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 sub-division
According to s. 618, 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.”
This allows a company to alter the number of shares and their nominal value, without changing the overall amount of share capital. A sub-division will divide some or all of its shares into more shares of a smaller nominal value, whereas a consolidation will amalgamate some or all of its issued shares into fewer shares of a larger nominal value.
As long as the articles of association or shareholders’ agreement do not prohibit consolidation or sub-division of shares, it is simply a matter of passing an ordinary resolution.
Form SH02 must be filed with Companies House within one month of the consolidation or sub-division taking place (s. 619), to provide notice of the procedure having taken place. A statement of capital must be filled out to reflect the company’s issued capital following the changes. The register of members needs to be updated and new share certificates should be issued.
Share redenomination (also known as redenomination 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” (s. 622 of the Companies Act 2006).
The main action which needs to be taken to effect a redenomination of share capital is to hold an ordinary resolution, subject to any restrictions or bespoke instructions contained 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 redenomination 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” – but if the redenomination has not taken effect at the end of the period of 28 days (beginning on the date on which it is passed), it will lapse.
Form SH14 must be used to give notice of a redenomination of shares to Companies House (s. 625). This must be done within one month of passing the resolution.
Share redenomination with reduction of capital
Section 626 of the Companies Act 2006 allows for the reduction of capital in connection with share redenomination. This requires a special resolution be passed within three months of the redenomination resolution.
The share capital reduction cannot exceed 10% of the nominal value of the company’s allotted share capital immediately after the reduction and, under section 628, the amount by which a company’s share capital is reduced must be transferred to a “redenomination reserve.” This reserve may be applied by the company in paying up shares to be allotted to members as fully paid bonus shares.
There is no need for court approval or a solvency statement if there is a reduction of capital in connection with redenomination, but Companies House must be notified within 15 days of the resolution being passed (section 627).
Reconversion of stock into shares
Under s. 620: “A limited company that has converted paid-up shares into stock…may reconvert that stock into paid-up shares of any nominal value.” This means if a company has previously converted shares to stock, it can reverse this.
It should be noted that this only applies to shares that were converted into stock before 1 October 2009 (the date of the final implementation of certain measures of the Companies Act 2006); it has not been possible to convert company shares to stock after this date.
An ordinary resolution must first be passed. Form SH02 must be filed with Companies House within one month of the resolution, to provide notice of the resolution. A statement of capital must be filled out to reflect the company’s issued capital following the changes.
Although this does not constitute a form of alteration of share capital under s. 617, the redesignation of shares (also known as reclassification or renaming of shares) can nevertheless have the effect of changing the overall structure of share capital within a limited company.
To redesignate shares, the members of the company must pass an ordinary resolution and submit form SH08 to Companies House. It may also be necessary to alter the articles of association which requires a special resolution.
Section 630 requires that, in the absence of express permission being given for variation for class rights in the company’s articles of association, 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.