Share issue: what is it and why issue shares?

Share issue is the process by which companies pass on new shares to shareholders, who may themselves be new or existing shareholders. Companies can issue shares to both individuals or corporate bodies, and in another article we provide a step by step guide to issue shares.

We’ve looked at how to transfer shares elsewhere, so we’ll focus on the allotment of shares here.

The main reason a company will issue new shares is to raise money to finance the business. Some examples will help to show the different scenarios where an allotment of shares may be considered. Here’s our top 10:

1. When the company is first incorporated, a number of shares will usually be issued – there are a number of factors that influence how many shares to issue. This share issue, along with any money that the company may borrow, enables the company to trade. The initial shareholders are often referred to as ‘subscribers‘, because they are said to subscribe to the new company’s memorandum of association.
2. Shares may be issued in order to repay some or all of the company’s borrowing.
3. New funds may simply be required to grow the business organically.
4. Issuing shares might also fund a particular new development or project, which will often require significant initial capital with the rewards (hopefully) seen in later years.
5. A share issue could be used to fund the purchase of another company. This may mean raising cash from a share issue and using that cash to buy the other business. Alternatively, new shares could be issued to the current shareholders of the target company – they’d effectively be exchanging their shares in the company being purchased for shares in the company that is buying it.
6. To repair a damaged balance sheet. Companies may need to allot shares to continue trading after a particularly difficult period, whether specific to that company, related to problems across an industry or part of a wider downturn in the whole economy.
7. The company can make a bonus or capitalisation issue of shares to existing shareholders. Instead of the shareholders needing to pay for the shares themselves, in this type of share issue the company uses its own profits to fund the allotment instead. This usually has the effect of reducing the value of the shares in issue, which may in turn make them more marketable to investors.
8. If shareholders prefer not to receive a cash dividend, the company may offer them a ‘scrip’ dividend instead – allotting shares of the same value as the cash dividend. This is often popular among companies because issuing shares as a dividend does not impact cashflow in the way a cash dividend does.
9. If a director or employee exercises a share option that they’ve been granted by the company, they may acquire the shares via an allotment to them.
10. As part of a new director or senior employee joining the business or an existing employee becoming a director, they may acquire shares in the company. Often used by professional companies, this can both demonstrate and cement the employee’s commitment to the business – they’ll have a clear and direct interest in the company’s success. The shares would either be passed to the employee by a new allotment of shares or via a transfer from existing shareholders.

The shares allotted will usually be in an existing share class, although sometimes there will be reasons to create a new share class. and the company might choose to make use of different types of share.

Having looked here at the reasons why a company may wish to make a share issue, elsewhere we go on to look at the things a company needs to think about before issuing shares, how to issue shares and what’s included in the SH01 form required by Companies House when making a share issue.

A previous version of this article was originally published on 5 August 2013.