How to Allot New Shares - Part 2: Process and Legal Considerations
In part 2 of this article, we are going to understand the share allotment process and the legal obstacles you might face when allotting shares. Part 1 of this article can be found here.
What to consider before allotting shares?
Do you need to allot shares?
Consider if it is possible to reach the same business objectives you may have in mind without necessarily allotting shares.
If you need money in the short-term, are there actions you can take to avoid the need to raise funds?
Is allotting shares the right way to go?
Understand that you will be giving up a degree of control by allotting shares.
Is allotting shares really the best way forward for your business?
Is it the best way to raise finance considering your business interests?
How much do you need to raise?
Perhaps, consider alternatives to allotting shares if you are in need of financial assistance.
Bank loans
Borrowing against assets
Loans from directors
You need to also consider the following practical matters:
Are you going to create a new class of shares or will the shares remain as part of an existing share class?
You need to consider voting rights.
How much will the shares be valued at?
There are many models that you can use to value private company shares. The key decision will be between valuing shares at a nominal value, or for a higher price (click here to see how a share premium can apply). The specialist advice of an accountant or solicitor could be very useful when valuing shares.
How many shares do you plan to issue?
This depends on the valuation of the shares and the amount of funds you are aiming to raise. In addition, consider the control and flexibility required by existing shareholders. Click here to see these considerations in further detail.
What payment terms will apply to the share issue
Will monies be collected upfront or will some of the required payment be deferred to a later date?
What legal obstacles might you need to consider when allotting shares?
There are certain areas that you should check to overcome possible legal obstables. Although this is not exhausive, it is a good starting point.
Do the directors have the authority to issue shares?
Authority is granted by (a) a provision in the company’s articles of association or (b) an ordinary resolution passed by the company’s shareholders.
However, directors do not need to grant authorisation from shareholders if the company has only one class of shares (and the new shares issued will remain in this existing class of shares) and if there is no restriction placed on a director’s authority in the articles of association.
Do existing shareholders benefit from pre-emption rights?
Pre-emption rights grant existing shareholders the privilege of having the first opportunity to purchase newly issued shares in a company. If pre-emption rights are in place, the company must offer the shares to the current shareholders before extending the offer to potential new investors.
Could an existing shareholder’s agreement restrict the issue of new shares?
A shareholder’s agreement is a good way to protect the interests of shareholders and the company. If a shareholder’s agreement exists within your company , it is worth checking that it does not contain any sort of restrictions in relation to issuing new shares.
When issues shares, you may want to consider if your existing shareholders’ agreement will apply to new shareholders of if it is worth putting one in place.
Check out our article on shareholder agreements here.
Are there any other restrictions in the Articles of Association?
Review the articles of association, especially if they are custom-made rather than the standard Model Articles for private companies, to determine whether there are any specific limitations regarding the allotting of new shares. The articles may outline a specific procedure that must be adhered to when issuing shares.
It is important to mention that each business will face its own unique obstacles when allotting shares, meaning this list above is not exhaustive.
Once you have checked that there are no legal obstacles in place that would prevent you from issuing shares, it is important that you understand and follow the process of allotting shares.
How do you allot shares?
There are 7 steps you should follow to allot shares:
Firstly, provide the applicants with a form of application.
You need to offer the shares to intended recipients verbally or in writing.
Hold a Board meeting to allot shares.
A board resolution must be passed to allot shares that approves key changes to the company’s share structure; approves applications, authorised share allotment, instructs necessary filings, issues share certificates, and updates register of members and allotments. Keep detailed minutes of the meeting for auditing and updating Companies House.
Issue share certificates to the allottees.
Having agreed on your share structure, issue new share certificates to the designated shareholders in accordance with the provisions of the Companies Act. Companies typically issue share certificates to shareholders for allotted shares within two months of allotment. The share certificates should be sent to the applicants along with a customised formal notification of allotment letter.
Submit form SH01 and a statement of capital to Companies House within one month of allotment. See below what a statement of capital should include. Take a look at this article dedicated to the SH01 form, which can be completed on the Companies House website.
Amend the register of members.
Update the register of members and register of allotments promptly to reflect new shareholders and share allotments. Once their name is added to the register, a person becomes a shareholder.
Include the allotments in the company's next confirmation statement (CS01).
When making share allotments, only the form SH01 needs to be sent to Companies House. Share certificates are not required to be lodged with Companies House; they are sent directly to shareholders. The names of new shareholders must be included in the company's next confirmation statement to show the new share structure within your company.
Finally, ensure the new shares issued are shown within the company’s accounts.
Please see the Govenment website for more detail about this process.
Statement of Capital: The statement of capital should include the company’s total number of shares, their total value, and the amount of shares that have been paid or unpaid for. You should also specify the rights associated with each type of share, the number of issued shares, and their total value before additional costs are added.
Keep in mind that if a shareholder has over a 25% holding in the company, you must add them to the PSC register as part of your confirmation statement. Click here for further details of the PSC register.
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
