Part 12 Share capital
When people form a company limited by shares they agree to contribute a specified amount to the running of the company. The amount contributed was traditionally represented by share certificates. The statement of capital and initial shareholdings on registration, see paragraph 75.42 will show the names and addresses of those people who have agreed to take shares together with the number taken. A share entitles the holder to receive a periodic payment, usually called a dividend, from the company’s profits, if any, and a proportion of its assets on dissolution.
75.222 Issued capital
Issued capital is the total value of all the shares issued to members. The issue capital refers to the nominal, or face, value of the shares rather than their actual value. On the stock market, for example, a 25p share may have a purchase price of £6.51. The directors of a company can increase its issued capital by issuing more shares within the powers specified in the company’s articles of association [Note 1]. A private company may normally issue shares to family, friends or employees by way of a private arrangement. A public company may offer shares to the public by means of a prospectus or by publishing a document known as “listing particulars”. The document must show, amongst other things, the company’s financial position, its assets and liabilities, its profits and losses, the rights attaching to the shares and its future prospects [Note 2].
75.223 Types of shares
A company may have many different types of shares. Each type of share would have separate conditions attached to them. The articles of association will specify the amount of the authorised share capital of a company and identify the classes of shares the company may issue, see parts 5 and 6. The most common types of shares are described in paragraphs 75.224, 75.225, 75.226 and 75.227.
Ordinary shares are the most common type of shares issued. An ordinary share allows the holder to a part of the company’s profits and they have full rights to participate in its ordinary meetings. An ordinary shareholder has no special rights or restrictions placed upon them. The company may divide shares into classes having different values, for example, a company may have an authorised share capital of 1,000 ordinary class A shares with a nominal value of £1.00, 2,000 ordinary class B shares with a nominal value of 50p and 10,000 ordinary class C shares with a nominal value of 10p.
Preference shares entitle the holder to receive the payment of an annual dividend before the holder of any other class of shares from the company’s profits. The holders of preference shares usually have no voting rights in a company’s ordinary meetings.
Cumulative preference shares usually carry a right to carry forward any dividends that a company cannot pay from one year to the following year.
Redeemable shares are issued by the company on the understanding that it can buy them back after a certain period or on a fixed date. The share capital of a company cannot be made up solely of redeemable shares. A company may issue redeemable shares to raise additional capital for a specific project which would then be repaid on a set date.
75.228 Bonus shares
Whilst not strictly a separate class, bonus shares may be issued if the articles of association allow. If allowed, a company may issue fully or partly paid shares to members in proportion to their existing holding. Bonus shares may be issued from any undistributed profits, sums credited to a “share premium account” (see paragraph 75.231) or “redenomination reserve” (see paragraph 75.244).
75.229 Public companies
A company incorporated as a public company cannot start trading or exercise any borrowing powers until it has obtained a trading certificate from the registrar of companies. To obtain a trading certificate a public company must have an “authorised minimum” share capital of £50,000. A private company seeking to re-register as a public company does not have to apply for a trading certificate but must have a nominal capital greater or equal to the “authorised minimum” of £50,000 and must include a set of audited accounts with the application for re-registration.
75.230 Allotment of shares
The directors may increase a company’s share capital by allotting additional shares. Any such allotment must be authorised by the articles of association or by a resolution of the company. Allotment describes the process whereby a person acquires, following issue of the shares, the unconditional right to be included in the company’s register of members [Note 3].
A company is able to charge a higher price for its shares than the nominal value shown on the certificate. The difference between the nominal value and the actual price is called the share premium. If a company issues shares at a premium, whether for cash or not, a sum equal to the total amount or value of the premiums on those shares must be transferred to “the share premium account”. The share premium account can be used to write off the expenses, and any commission paid, on the share issue It may also be used to allot fully paid bonus shares to members of the company [Note 4].
75.232 Payment for shares in a private company
The payment for a share in a private company can be made in a number of ways, including cash, goods, services, property, goodwill, knowledge or shares in another company.
75.233 Payment for shares in a public company
Generally the payment for shares in a public company is in cash. However, in those instances where payment is not in cash it is usual for the consideration to be subject to an independent valuation.
75.234 Allotment and the registrar of companies
A limited company must inform the registrar of companies of an allotment of shares within one month. The return made must include a statement of capital and show the number of shares allotted, the amount paid in cash and remaining unpaid and the amount (if any) paid otherwise than in cash together with a brief description of the non-cash payment [Note 5]. If the company fails to make the return then it and every officer in default commits an offence [Note 6].
75.235 Statement of capital
The statement of capital, which must be returned to the registrar of companies with the return of the allotment, shows the total number of shares of the company, the aggregate nominal value of the shares, details of the rights attached to each class of shares together with the nominal value of the shares in each class and the amount paid up, including any premium, and the amount unpaid [Note 7].
A company, by passing a resolution, can change its share capital or any class of its share capital into another currency. The resolution must state the spot rate used to convert into the new currency. This can either be a rate of exchange on a particular date or the average rate taken from each consecutive day for a given period. The day or period chosen must be within the 28 days ending on the day the resolution was passed [Note 8].
75.237 Changing the nominal value of shares
A company may, by ordinary resolution, change the nominal value of its shares, unless its articles of association include a prohibition or other restriction. A company may sub-divide its shares, or any of them, into a smaller nominal value, for example converting a £1 share into 20 shares of 5p. A company may also consolidate and divide its share capital into shares of larger amounts. For example it may consolidate and divide 200 £1 shares into 50 shares of £4. A company may also convert any stock into paid shares of any nominal value [Note 9]. A company must deliver notice to the registrar of companies that it has changed the nominal value of its shares, together with a statement of capital, within one month of the change [Note 10].
75.238 Variation of class rights
The rights attached to a class of shares are usually known as “class rights”. The articles of association may describe what class rights are and how they may be altered. If the articles of association do not contain such provisions the company can alter class rights, either by obtaining the consent of at least three quarters, of the nominal value, of the issued shares of that class, or by the members of that class passing a special resolution, see paragraph 75.199 at a separate general meeting.
75.239 Notification of a variation in class rights
A copy of any special resolution passed at a general meeting must be delivered to the registrar of companies within 15 days. If the company fails to deliver the special resolution to the registrar of companies, it and every officer in default commits an offence [Note 11]. The company must also deliver particulars of the variation within one month of the alteration. If the company defaults in providing notice, it and every officer in default commits an offence [Note 12].
75.240 Application to court to stop an alteration in class rights
Members who disagree with the alteration in class rights and hold at least 15% of the aggregate nominal value of the shares in question can apply to the court to cancel the variation. The application must be made no later than 21 days after the consent was given or the resolution passed. The court may confirm or cancel the alteration in the class rights [Note 13]. The company must forward a copy of the court order no more than 15 days after it was made to the registrar of companies. If the company fails to do so it and every officer in default commits an offence [Note 14].
75.241 Reduction of share capital
A company can only reduce its share capital in the following circumstances, a deduction following redenomination (see paragraph 75.236), a reduction supported by a statement of solvency (called a solvency statement) or a reduction supported by a court order.
75.242 A reduction resulting from changing the denomination of shares
In changing the share capital from one currency to another the total value of a company’s nominal share capital may be reduced. For example, in December 2011, £1 was worth $1.578. If a company agreed to convert its shares from pounds sterling to US dollars it would have to decide the nominal value of one share. If the company decided that the nominal value would be $1.5 then the value of the total share capital value would fall. If the fall does not exceed 10% of the nominal value of allotted share capital immediately following the reduction, the company must pass a special resolution authorising the reduction within 3 months of the reduction being made [Note 15].
75.243 Registration of the reduction
A copy of the special resolution must be delivered to the registrar of companies within 15 days together with a statement of capital and a directors‘ statement confirming that the reduction does not exceed 10% of the nominal value of the allotted shares immediately following the reduction. If the company fails to deliver a copy of the order to the registrar of companies it and every officer in default commits an offence [Note 16].
After a reduction in share capital resulting from a change in the denomination of the shares the balance must be transferred to a reserve, called “the redenomination reserve”. This reserve may be used to issue fully paid bonus shares [Note 17].
A private limited company may reduce its share capital by special resolution supported by a solvency statement, provided that the reduction does not result in only redeemable shares being held [Note 18]. The directors in signing a solvency statement have formed the opinion that the company can pay, or otherwise discharge all its debts at that date, that if the company was to be wound up within 12 months it could pay, or otherwise discharge, all its debts within the 12 months following the winding up, or that the company will be able to pay, or otherwise discharge, its debts as they fall due during the year following that date. The solvency statement must be in the prescribed form and state the date on which it is made and the name of each of the company’s directors. If a solvency statement is made and delivered to the registrar of companies without reasonable grounds for the opinions expressed in that statement, every director in default has committed an offence [Note 19].
75.246 Circulation of solvency statement
If a company wishes to reduce its share capital by a written special resolution, see paragraph 75.194, it must circulate the solvency statement to every eligible member at or before the time the resolution is sent out. Where the special resolution is to be proposed at a general meeting the solvency statement must be made available for inspection by members throughout the duration of the meeting [Note 20]. Failure to distribute the solvency statement does not affect the validity of the resolution [Note 21], however an offence will be committed by every officer who is responsible for the default [Note 22].
75.247 Registration of the reduction
The company if it reduces its share capital in this manner, must deliver, within 15 days of the special resolution, to the registrar of companies a copy of the special resolution authorising the reduction, a copy of the solvency statement, a statement of capital, a statement of compliance by the directors [Note 23] and a fee. Currently, the fee is £10 for standard service and £50 for same day service. The reduction takes effect when the registrar of companies register all the documents [Note 24]. If the company fails to deliver a copy of the specified documents to the registrar of companies, it and every officer in default commits an offence [Note 25].
75.248 Application to court to reduce the share capital
A company may reduce its share capital by passing a special resolution and then making an application to the court to confirm the reduction [Note 26]. The company must also prepare a statement of capital which requires the approval of the court [Note 27]. If the proposed reduction of share capital involves a diminution of liability in respect of unpaid share capital or the payment to a member of any paid-up share capital the creditors of the company are entitled to object to the reduction unless the court directs otherwise [Note 28].
75.249 Creditors can object to a reduction in share capital
If the creditors of the company are allowed to object to a reduction in share capital, the court will fix a date at which every creditor entitled to lodge a proof of debt if the company had gone into liquidation on that date would be placed on a list of creditors. The list of creditors settled by the court will show the name, address, amount outstanding and consideration for each creditor. The court will publish a date by which creditors not on the list may lodge a claim to be entered on the list. A company can pay, or secure the debt of, a creditor who objects to the reduction with the agreement of the court [Note 29]. An officer who intentionally or recklessly conceals a creditor or misrepresents the claim of the creditor may be guilty of an offence [Note 30].
75.250 Decision of the court
The court may make an order which allows the company to reduce its share capital on any terms and conditions it thinks fit. To make the order the court needs to be satisfied that every creditor who is entitled to object has signalled their agreement or been paid or had their debt secured. The court may also order the company to publish the reasons for the reduction in share capital or any other information it thinks is needed to inform the public. The court may also order the words “and reduced” are added at the end of the company’s name for a specified period [Note 31].
75.251 Registration of the court’s decision
The company must deliver to the registrar of companies a copy of the court order together with the statement of capital. The reduction of capital does not take effect until the registrar of companies has registered the court order and the statement of capital. The registrar of companies must also certify the registration of the order and statement of capital. The certificate is conclusive evidence that the Companies Act 2006 has been complied with [Note 32].
75.252 Reduction of a public company’s share capital
If a public company obtains a court order reducing its share capital below the authorised minimum of £50,000 then the registrar of companies must not register the order unless the court so directs or the company is first re-registered as a private company [Note 33]. The court may specify in its order the changes needed to the company’s name and constitution required for its new status as a private company. If the order covers this and the company supplies copies of the court order, notice of its new name and articles of association the registrar of companies must issue a certificate of incorporation altered to meet the new circumstances, stating the date of issue and that it is issued on re-registration [Note 34].
75.253 The effects of a reduction in share capital
Where a company’s share capital has been reduced and a member has not fully paid for his/her shares, the amount outstanding is the difference between what has been paid and the new nominal value of his/her shares [Note 35]. However, if a creditor who would have objected to the reduction in share capital, and that share capital remains unpaid, was not shown on the settled list of creditors considered by the court, the member would have to pay the difference between the amount paid and the nominal value of his/her shares as if the winding up of the company had commenced on the day before the resolution reducing the share capital [Note 36].
75.254 Reserve arising from a reduction of share capital
Where a company reduces its share capital, for example from £50 million to £40 million, the surplus, in this instance, £10 million, is placed in a reserve. This reserve is usually not available for distribution to members. However the Secretary of State may make an order allowing the reserve to be treated as a realised profit and be distributed to members [Note 37].
75.255 Restriction on a limited company buying its own shares
A limited company is generally not allowed to acquire its own shares, either by purchase, subscription or otherwise, except in the circumstances outlined in paragraphs 75.256 to 75.258 [Note 38]. If a company purchases its own shares outside of these exceptions it and every officer who is in default commits an offence [Note 39].
A company can acquire its own shares, otherwise than for valuable consideration, to reduce its share capital, pursuant to a court order. It can also accept the forfeiture of shares, or the surrender of shares in lieu of forfeiture, for failure to pay for the shares under the terms of the articles of association [Note 40].
75.257 Acquisition of shares for valuable consideration
A limited company having a share capital may purchase its own shares (including redeemable shares) [Note 41] if the shares are fully paid up and the monies paid over on purchase [Note 42]. After the purchase of the shares there must be at least one other member, other than the company, and those holding redeemable or treasury shares (for a definition of treasury shares see section 724 onwards of the Companies Act 2006) [Note 43].
A private company , subject to any restrictions in its articles of association may pass a special resolution to finance the purchase or redemption of shares out of capital. Such a purchase must be accompanied by a statement of solvency signed by all the company’s directors, see paragraph 75.245 [Note 44]. A copy of the solvency statement together with an auditor’s report confirming the directors’ opinion must be made available to the members at or before the circulation of a written resolution or at a meeting to discuss it [Note 45]. If a solvency statement is made without reasonable grounds for the opinions expressed therein every director in default has committed an offence [Note 46].
75.259 Public notice of resolution to purchase shares
In the week immediately following the resolution to purchase its own shares a company must publish a notice in the Gazette, advertise by placing a notice in a national newspaper, or give notice in writing to its creditors, and deliver to the registrar of companies a copy of the statement of solvency and the auditor’s report [Note 47]. In addition the statement of solvency and auditor’s report must be kept available for inspection at the company’s registered office, or other specified address, from the date the notice is published ending 5 weeks from the date of the special resolution. If the solvency statement and auditor’s report are not kept at the registered office notice of their whereabouts must be given to the registrar of companies, together with notice of any change of address. Failure to do so is an offence committed by the company and every officer in default [Note 48].
75.260 Application to court to stop a company purchasing its own shares
Members who voted against the purchase and any creditor may apply to the court to cancel the special resolution. The application must be made no later than 5 weeks after the resolution was passed. The court may confirm or cancel the special resolution for the company to purchase its own shares. The court may make additional orders relating to timescales, reduction of the company’s share capital, alter the articles of association and insist that any or specified future alterations to the articles only take place with the leave of court [Note 49]. The company must notify the registrar of companies immediately an application to court is received and deliver to the registrar a copy of the court order no more than 15 days after it was made. If the company fails to deliver either of the above to the registrar of companies it and every officer in default commits an offence [Note 50].
75.261 Timescale for payment for a company’s own shares
The payment out of the company’s own capital must be made no earlier than five weeks after the date the resolution was passed and no later than seven weeks after that date. The court may extend this timescale if there is an application to stop the company purchasing its own shares and the application is unsuccessful [Note 51]. In those circumstances the payment would need to be made no later than 12 weeks after the date the resolution was passed.