How to Allot New Shares - Part 1: Impacts on Your Company
If you are looking to raise funds or thinking of expanding your business, allotting new shares might have come up on your company agenda. In part 1 of this article, we will look at what a share allotment is and explore the positive impacts share allotments could potentially have on your company.
What are shares?
Shares are a means of dividing ownership in a company.
When individuals hold shares, they usually gain voting rights and influence in the company's decision-making process. They will also receive dividends based on their shareholdings.
Why issue shares?
A company may choose to issue shares for several reasons.
The key reasons being that it is a great way to raise finance and bring on board new business partners. This can help to expand and advance the business in various useful ways.
Take a look below at some of the benefits allotting shares can bring to your business
What is a share allotment?
‘Allotting’ and ‘issuing’ shares are often used interchangeably.
Share allotment occurs when a company creates and issues new shares in exchange for money or other benefits to existing or new shareholders.
You might decide that you want to change the share structure of your company, either by introducing a new shareholder or by changing the distribution of shares amongst existing shareholders. New shares can be allotted (issued) when there are not enough shares available for transfer or when it’s not advantageous to redistribute existing shares.
You must inform Companies House if you make any changes to your company's shares outside of your confirmation statement.
What are the benefits of allotting shares to a company?
The specific benefits of allotting shares may vary depending on the company's objectives, industry, and the terms and conditions associated with the shares.
Benefits include:
Raising Capital: it allows a company to raise capital by selling ownership stakes in the business. These funds can be used to expand business operations.
Ownership Dilution and Risk Sharing: the company's ownership can be divided among several shareholders,helping to distribute the risks and duties related to managing the company.
Employee incentives: Companies can introduce employee share schemes or stock options can help to incentivise and retain talented personnel.
Valuation and financial flexibility: Allotting shares can enhance the company's valuation, especially if the shares are issued at a premium (see below). It can also provide the company with additional financial flexibility by increasing its equity base, which can be beneficial when seeking loans.
Allotting shares to family and friends: Instead of accepting a loan from family or friends, you have the option to issue shares to them in exchange for their investment in your business. This way, you are not obligated to make repayments and they become shareholders in your company.
Attracting investors: A limited company can draw in interested parties. It offers the chance for people, investors, or other businesses to become shareholders and profit from the growth of the business through capital appreciation and dividends.
How is a share premium calculated?
Share premium = Share premium refers to the additional amount paid by shareholders for shares above their nominal value. It represents the difference between the nominal value and the market value of those shares.
For example, if a £1 ordinary share is allotted for £10, the share premium will be £9. When shares are allotted at a premium, the company is required to establish a share premium account. This is another balance sheet entry which records the total amount of share premium across the allotments.
Who can allot shares?
The issuing of new shares must be formally actioned by the director of the company.
In companies with a single class of shares, the directors possess the power to allocate shares of that specific class. However, in companies with multiple classes of shares, the directors must obtain authorisation either through a provision in the company's articles or via an ordinary resolution (section 551, Companies Act 2006).
Therefore, in some cases, shareholders need to grant the directors the authority to issue new shares.
Author: Natalie Achou -
Author: Natalie Achou -
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Johnathan Korchak, 'How to issue shares – step by step' (Inform Direct, 20 February 2022) <https://www.informdirect.co.uk/shares/how-to-issue-shares-step-by-step/> accessed 30 May 2023
Johnathan Korchak, 'Things to consider before issuing new shares in a UK limited company' (Inform Direct, 23 June 2014) <https://www.informdirect.co.uk/shares/issuing-new-uk-limited-company-shares-things-to-consider/> accessed 30 May 2023
Thomson Reuters, 'Allotting and issuing shares in private or unlisted public companies toolkit' ( Thomson Reuters Practical Law, 2023) <https://uk.practicallaw.thomsonreuters.com/Document/I6086f515038c11e598db8b09b4f043e0/View/FullText.html?transitionType=SearchItem&contextData=(sc.Search)> accessed 30 May 2023
