Raising money for a company by issuing shares can open up a lot of opportunities. However, not all expanding companies will want to allot further shares, and often businesses can meet their objectives in other ways or raise finance from other sources.
In this article we examine the issues a company should consider before diving into the process of issuing new shares and the practical questions that need to be answered before a share issue. Once it’s decided to allot shares, we also look at the legal issues that may need to be resolved beforehand – and show you how they can be overcome.
Manage your company's shares the easy way
Inform Direct is the innovative and straightforward way to make new share allotments, record share transfers and process share reorganisations.Start now
Deciding on a share issue
Before starting to allot shares, take a final look at the reasons why you want to issue shares and make sure you’re comfortable with them. It’s possible, for example, that you might be able to achieve the same business objectives without raising funds. If money is tight in the short term but beyond that the business is likely to be profitable, are there actions that can be taken to avoid the need to raise funds? For example, you might consider deferring some costs until later, reviewing payment terms and chasing those who already owe the business money.
Even if a capital injection is required, however, give serious thought to whether an allotment of shares is the right way to go – particularly if doing so will mean giving up a level of control. You might look at alternatives such as:
- Bank loans
- Use of an overdraft facility
- Loans from the directors
- Borrowing against assets
- Sale and lease back of assets or other equipment
- Government grants, if you qualify for them
Bear in mind that if your company is currently dormant, the issue of new shares is one of the ways in which it will lose that dormant status.
Ultimately, the question of whether to raise finance and the method of doing so should be in the best interests of the company, which the directors have the duty to consider.
Practical matters to decide upon
With the amount you need to raise agreed, there are also several practical questions to answer about proposed share issue:
Will the shares be of an existing share class or should a new class be created?
Usually, companies will issue further shares in an existing share class. However, if new shares are to have different voting or other rights to existing shares, they will need to form a new class of shares.
How much to value the shares at?
There are many models of how to value private company shares. A valuation of the company will help define the value of the shares already in issue, which in turn will have a bearing on how much to charge for new shares being issued. It’s very possible that the shares will be issued for a price higher than their nominal value – we looked elsewhere at example of how a share premium can apply.
The valuation of shares and decision on the terms of a new issue are areas where the advice of an accountant, solicitor or corporate finance specialist can be particularly useful.
How many shares should be issued?
Depending on the valuation of the shares, the amount of funds being raised and the flexibility required by shareholders, the company may choose to issue more or fewer shares. We’ve looked elsewhere at the things to consider when deciding how many shares to issue.
What payment terms will apply to the share issue?
Usually, the need for funds will mean all the required monies are collected upfront when new shares are issued. However, for many companies it’s possible to issue unpaid or partly paid shares, where some or all of the required payment is deferred until a later date.
Checking and overcoming obstacles to allotting shares
Once the directors have concluded that a share allotment is the right way to raise funds and decided on the practicalities of the issue, they’ll need to ensure there are no legal obstacles to proceeding. Before continuing with the issue of shares, there are several such legal areas that need to be investigated.
While the below list is not exhaustive, it includes the most common areas that should be checked. We also look at how to overcome the most common barriers to proceeding with issuing shares:
1 Do the directors have authority to issue shares?
The company’s shareholders must have granted authority for the directors to issue shares. Authority may be granted by either:
- A provision in the company’s articles of association; or
- An ordinary resolution passed by the company’s shareholders
If no such authority is already in place, a new shareholders’ resolution will need to be passed.
There is one major exception to the requirement to gain shareholders’ authority to issue shares. The directors of a private limited company incorporated under the Companies Act 2006 do not need to seek authorisation from the shareholders if:
- There is no restriction placed on their authority in the articles of association;
- The company has only one class of shares; and
- The new share issue does not involve creation of a new class of shares.
2 Will the allotment exceed a limit on authorised share capital?
If the company was formed before October 2009 and hasn’t amended its articles of association since then, you’ll need to check the company’s constitutional documents for the authorised share capital. This is an overall upper limit on the number of shares that the company can issue.
If the proposed share allotment would mean the authorised share capital is exceeded, the limit will need to either be removed or increased.
The options are therefore to:
- Pass a special resolution to amend the articles of association and remove the authorised share capital restriction. Our template Shareholders’ resolution to remove authorised share capital restriction can be adapted and used here. Many companies will, however, use this opportunity to adopt a whole new set of articles with modern provisions of good governance.
- Pass an ordinary resolution of shareholders to increase the level of authorised share capital so that there’s sufficient to make the new share allotments. This option is less of a long term option than the first, since the authorised share capital may need to be raised again in the future, but may be preferred if the shareholders wish to exert more control on the actions of the directors.
3 Do existing shareholders benefit from pre-emption rights?
Pre-emption rights give existing shareholders first refusal when a company issues new shares. If pre-emption rights exist, shares must be offered to the current shareholders before being offered to potential new investors.
Pre-emption rights may arise in a number of ways, but they can also be waived by the current shareholders for a particular share issue or excluded completely. We look at how to do this, and give you the templates you’ll need, in our article about pre-emption rights.
4 Does a shareholders' agreement restrict the issue of new shares?
Not all companies have one, but a shareholder’s agreement can be a useful way of protecting the interests of both shareholders and the company. Where one does exist, you should check that it doesn’t contain any restrictions on issuing new shares.
You should also consider whether an existing shareholders’ agreement will apply to new shareholders or, if an agreement doesn’t exist, whether this share issue is an appropriate time to put one in place.
5 Are there any other restrictions in the Articles of Association?
We’ve already mentioned restrictions on the directors’ authority to allot shares and pre-emption rights, which may feature in the company’s articles. Check through the articles of association, particularly if they are bespoke rather than the standard Model Articles for private companies, to identify if there are any other particular restrictions on new share issue. Even if restrictions do not exist, the articles could define a procedure that must be followed for share allotments to be valid.
Once you’ve decided to proceed with an issue of shares and made sure there’s no obstacles to proceeding (or resolved them as described above), you’ll need to follow of process of allotting the shares themselves. We’ve created a step by step guide to issuing shares, together with templates you can use for a successful and stress-free share issue.
Inform Direct is the innovative and easy way to manage a company's shares, make new share allotments, record share transfers and more.