You can issue more shares in a company after it has been formed. You may wish to do this to raise additional capital, bring in a business partner or achieve some other kind of objective.
There are a number of factors you will have to consider before allotting more shares in your company, namely: authorised share capital, pre-emption rights and the directors’ powers to allot.
These restrictions are often put in place to prevent or limit the dilution of existing shares.
What is authorised share capital?
This was a mandatory provision under the Companies Act 1985 that restricted the maximum amount of share capital a company could issue. Before the Companies Act 2006 came into full effect on 1st October 2009, limited companies had to state their authorised capital in their memorandum and articles of association. This was shown as a sum of money divided into a quantity of shares of a fixed amount. Companies were not required to issue all of them, but they were not permitted to issue more than the authorised sum.
This provision was abolished because Stamp Duty is no longer payable on authorised capital. It used to be that a company was required to pay Stamp Duty to HMRC when it was registered with Companies House; therefore, the higher the authorised capital, the higher the Stamp Duty fee. This was the reason for many companies setting up with share capital of just £100. Stamp Duty is now only payable when shares are sold for a sum that exceeds £1,000.
Any company that retains this provision in its articles can now remove it or increase the authorised sum. It is also possible for companies to add this provision to their articles at any time during or after company formation. To alter the articles after incorporation, company members must pass a special resolution.
The total share capital of a company determines the limited liability of its shareholders (members); therefore, some companies still wish to restrict the total financial liability of their owners to a lower figure.
What are pre-emption rights of existing shareholders
Pre-emption rights on the allotment of shares may be included in the articles of association and a shareholders’ agreement to protect the beneficial rights. If pre-emption rights exist, new shares must first be offered to existing members before they can be offered to anyone else. This provision is intended to protect the rights of current owners by preventing the unfair dilution of their shares.
When new shares become available, members can waive their pre-emption rights (by writing to the company or passing a Special Resolution) or buy the available shares in relation to their current percentage of ownership.
Directors’ powers to issue more shares
Directors’ powers are granted by members and outlined in the articles of association. Some companies will allow their directors to approve allotments without seeking approval from the members or being subject to any time limits, whilst others will restrict their directors’ powers in these situations.
If any such restrictions exist, the owners of the company will have to pass a resolution to authorise any allotments. This enables them to maintain control of their current percentage of ownership by preventing the unfair dilution of their shares.
How to complete a Return of Allotment of Shares
A ‘Return of Allotment’ (Form SH01) must be completed and delivered to Companies House within one month of any allotment. The following information will be required on this form:
- Full company name.
- Company registration number (CRN).
- Date(s) of allotment(s).
- Details of the allotted shares – class, quantity, currency, nominal value, amount paid or unpaid on each.
- Details of any non-cash payments, for example: awarding bonuses or selling shares in exchange for anything other than cash.
- Statement of capital detailing the company’s total issued capital at the date of the return.
- Prescribed particulars attached to each share.
- Authorising signature on behalf of the company.
You can deliver the Return of Allotment via Companies House WebFiling or Rapid Formations’ free Online Admin Portal.
There is no need to provide the names of any new members at this time. You will include this information on the next annual confirmation statement (previously known as an annual return). Companies House will then update the public register accordingly. If you wish to update members’ details sooner, you can file an early confirmation statement.
A certificate should be issued with each allotment. The company should also retain copies of these certificates and update the statutory company records with details of the new allotments and members.