Shares and share issues
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
Share capital
Historically, companies have had two kinds of share capital.
Authorised is the share capital the company has
created and the maximum it can issue. A company with a £1m
authorised share capital may, for example, have 10 million
authorised shares of 10p each.
Issued is the share capital issued and held by
shareholders. It may be all 10 million shares in the above example,
or only nine million, leaving one million authorised but
unissued.
From October 2008, however, the Companies Act 2006 does away
with the requirement for authorised share capital, leaving just the
shares that have actually been issued.
Share values
A share will have a nominal or par value: 1p,
10p, £1 or any other sum in any currency. And it is an absolute
rule that a share cannot be issued fully paid for anything less
than its nominal value – that is, it cannot be issued at a
discount. A company cannot issue a £1 share fully paid for 99p or
less. A company thus has no ability to issue free shares (but it
may buy shares in the market and give them as free shares to
employees, say, as part of an incentive scheme).
A company is able to issue shares nil or partly
paid. That means it can issue a £1 share nil paid and take
no money for it on issue; or it may issue the share partly paid,
say as to 25p. The amount unpaid (the full £1 or the balance of
75p) remains due and will have to be paid when the company calls
for payment at a time anticipated in the terms of the share’s
issue, or on a winding up if the company’s assets are not enough to
settle its liabilities.
Of course, a £1 share will often be issued with a price being
paid to the company well in excess of that sum; the difference
between the nominal value and the price paid is the premium. The
directors are under a duty in issuing shares (as in all things) to
act in the best interests of the company, and if a £1 share has a
market value of £1.50, they must have a good reason for issuing it
for anything less than £1.50. The nominal value is only the
minimum price at which shares can be issued.
Different classes of share
Unless the articles say otherwise, all shares will rank equally.
But to the extent they are given different rights – to dividends,
to a return of capital on winding up and on voting – they will
comprise different classes of share. A company may have one class
of share or it may have many.
Ordinary shares are the basic building block of
a company’s share capital. They will carry votes (usually one
each), have a right to a dividend if the directors decide to pay
one, and also be entitled to share in any surplus on a winding up
of the company. Other shares will take their rights, or lack of
them, by reference to this base position. Non-voting
shares are self-explanatory (and a rarity these days,
generally shunned by investing institutions but favoured by
companies with a substantial family shareholding – for example,
Daily Mail and General Trust). Preference shares
may have a preferential right to a dividend ahead of the ordinary
shares, or to a return of capital, or both. Deferred
shares will rank behind the ordinaries (and tend to be
used in a capital reorganisation where there is a need to make the
shares virtually valueless).
Where these different classes of share exist, the rights of each
one can only be changed in line with requirements in the articles
or, if they are silent, requirements in the Companies Act. The
articles will commonly stipulate a certain level of consent to any
change; in default, the Act requires the holders of 75 per cent in
nominal value to consent in writing, or holders of shares of that
class to pass a special resolution (see our OUT-LAW guide to
Company meetings) approving the change
at a separate meeting. Outside investors in a non-listed company
may often expand the definition of what amounts to a class right
and so prevent certain acts of the company (for example, the
payment of a dividend) without their prior consent.
Share issues
Directors cannot issue newly created shares without shareholder
authority to do so. Two provisions of the Companies Act 1985 are
key here and will be familiar from any listed company AGM
notice:
Section 80 stops the directors from issuing
shares to anyone unless they are authorised to do so in the
articles or by shareholders passing an ordinary resolution. This
ban includes an agreement to issue shares and the grant of options
that will result in a future issue of shares (although employee
share schemes are exempt). Listed companies will ask shareholders
to give them this authority each year at the AGM, but will have to
respect certain limitations stipulated by institutional
shareholders – the rule has been that only 15 per cent of the
authorised share capital can be issued – and the authority has to
be renewed at each AGM.
The Companies Act 2006 replaces this in October 2008 with new
sections 549 and 551, and the restriction will no longer apply to a
private company with only one class of share.
Section 89 obliges a company to offer new
shares first of all to its existing shareholders in the same
proportions they already hold shares. In other words, it upholds
shareholders’ right to be protected from dilution. If they are
willing to pay the price asked for the new shares, they can have
them. But this only applies where the shares are offered for cash –
if a company is issuing shares in exchange for shares in another
company, say, or in payment for a non-cash asset, there is no
requirement to offer the shares to existing shareholders first of
all.
The section can be disapplied, along with section 80, either in
the articles or by a shareholder vote, though only by a special
resolution. These rules are repeated in the Companies Act 2006
(section 561 and following).
Again, institutional shareholders have their price: only shares
equal to five per cent of the issued share capital can be issued
without first offering them to shareholders.
Rights issues and bonus issues
A rights issue is a common way for a company to
raise fresh capital: it issues new shares, offering them first to
existing shareholders. Indeed, section 89, discussed above, obliges
a company to treat any issue of shares for cash as a rights issue
unless the shareholders have first agreed otherwise. (A rights
issue for a listed company will often not follow the section 89
procedure because of various practical difficulties and the
additional requirements of the Listing Rules.)
A listed company rights issue will usually offer shares at a
discount to the current market price, sometimes a heavy discount if
the shareholders’ appetite for the shares needs to be stimulated.
That discount means that there is an inherent value in the right to
be offered the shares, and the shareholders in a listed company can
trade those rights and realise that value if they do not want to
take up the shares themselves.
Alternatives to a rights issue include an open
offer where shareholders are invited to subscribe to
a number of new shares based on their proportionate entitlements.
This can be less complex than a rights issue but it does not give
shareholders the opportunity to trade their rights to take up
shares and so benefit from the discount. A vendor
placing may also be used where one company is buying
shares in another. Shares are allotted by the purchaser to the
sellers of the target but the purchaser’s investment bank agrees to
find investors or placees who will take those shares and so give
the sellers cash. Institutional shareholders of the purchaser may
insist on a clawback whereby those shares are first offered to them
in proportion to their existing holdings.
A bonus issue involves no new money. Also
called a capitalisation or scrip issue, it takes a
sum from the company’s reserves (distributable profits that could
be used to pay a dividend, or the share premium account) and
capitalises it by using it to pay for the new shares. The issued
share capital is increased without any new money being invested.
The new shares are issued to existing shareholders pro rata to
their shareholdings and so no dilution occurs.
