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| 1. Company subscribers may be residents outside the UK.
2. You must appoint a minimum of 1 Director.
3. Directors can be corporate bodies or private individuals.
4. A Director can be of any nationality.
5. All companies must appoint a company Secretary.
6. A Secretary can be of any nationality.
7. If there is only ONE Director he or she CANNOT also be the Secretary.
8. There is no maximum and no minimum share capital.
9. There is no minimum share capital, no paid-in capital requirement.
10. The company is required to have a registered office in the UK.
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 United Kingdom Limited Companies Shares and Capital
A company is owned by its shareholders. Companies without a share capital will have some other method of determining ownership. The overwhelming majority of companies have a share capital consisting of one or more classes of shares. Company law and company lawyers have been extremely hesitant in offering any precise legal definition of the share, being content to deal with shares in a pragmatic rather than a theoretical manner. The most generally accepted definition of the share states that it represents: "the interest of the shareholder in the company measured by a sum of money, for the purposes of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders" (Borland's Trustees v Steel (1901)). The three elements of this definition will be examined in turn, followed by a consideration of the most common types of shares.
- Limited Liability
The nominal value of the share normally fixes the amount which the shareholder is required to contribute to the assets of the company. One of the results of the doctrine of separate personality is that members of a corporation are not personally liable for corporate debts unless they agree to such liability. In the case of companies registered under the Companies Acts, they are only granted the privilege of incorporation on the basis of their members accepting a limited degree of liability for corporate debts. Section 1(2) of the Companies Act 1985 provides that "members' liability is limited to the amount (if any) remaining unpaid on their shares."
Shareholders must pay at least the full nominal value of any shares issued to them (i.e., shares must not be issued at a discount s.100). Where, however, the company issues shares at a premium, i.e., at more than the nominal value of the shares, as is quite common, then the holders of those shares will be liable to pay the amount owed, over and above the nominal value. The excess will still form part of the company's capital but will be included in a distinct share premium account (s.130) and may only be used for limited purposes.
- What is Limited Company Share Capital?
When a company is formed, the person or people forming it decide whether shares will limit its members' liability. The Memorandum of Association (one of the documents by which the company is formed) will state: the amount of share capital the company will have; and the division of the share capital into shares of a fixed amount.
In a company limited by shares, the company's Memorandum of Association has a capital clause which states the amount of the share capital by which the company proposes to be registered and its division into shares of a fixed amount. The amount of share capital with which a company is initially registered (or the amount to which it may subsequently be increased) is the AUTHORISED or NOMINAL capital of the company. It sets the maximum number of shares that the company can issue together with the value of each share (s. 2 (5)). Shares in United Kingdom companies are required to have some nominal value: no par value shares, as are found in other jurisdictions, such as the USA, are therefore not permitted in the UK, although the shares need not be valued in Sterling. There is no requirement that companies issue shares to the full extent of their authorised capital. It is important, therefore, not to assume that the authorised capital represents a meaningful statement of the company's true capital.
For example, a company with a capital clause stating it has £1,000.00 share capital of £1.00 each has an authorised (or nominal) share capital of £1,000.00 divided into 1,000 £1.00 shares.
The authorised share capital refers to the maximum number of shares available for issue and the nominal value of each share. Once a company has begun trading the actual value of the shares will vary depending on the success of the trading activities, but the nominal value of the shares does not change. Authorised share capital can only be increased with the approval of the existing shareholders by ordinary resolution.
There is NO maximum to any company's authorised share capital and NO minimum share capital for UK private limited companies. However, a public limited company must have an authorised share capital of at least £50,000.
- Issued or Allotted Capital
Issued capital is that part of the company's total authorised or nominal capital which has been issued and taken up by the members of the company, having been issued either for cash or for a consideration other than cash, and is expressed by reference to the aggregate nominal value of the shares issued. The amount of issued capital cannot exceed the amount of the authorised capital.
Accordingly, a company with an authorised capital of 1,000 £1.00 shares which issues 250 of the shares has an issued share capital of £250.00. A private company NEED NOT issue all its capital at once, but a public limited company MUST have at least £50,000 of allotted share capital. Of this, 25% of the nominal value of each share and any premium must be paid up before it can start business or borrow.
- Paid-Up Capital
This is the proportion of the nominal value of the issued capital actually paid by the shareholder. It may be the full nominal value, in which case the share is said to be fully paid up and it fulfils the shareholder’s responsibility to outsiders. Alternatively the share may be only partly paid up, in which case the company has an outstanding claim against the shareholder. Shares in public companies must be paid up to the extent of at least a quarter of their nominal value (s.101 of the CA 1985). Where a company has issued shares as not fully paid up it can at a later time make a call on those shares. This means that the shareholders are required to provide more capital, up to the amount remaining unpaid on the nominal value of their shares. Called capital should equal paid-up capital: uncalled capital is the amount remaining unpaid on issued capital.
The following could be a theoretical capital structure for a public limited company:
Authorised capital:- £100,000
Issued capital:- £50,000
Paid-up capital:- £12,500
Legal definitions usually state that the share is a form of property representing a proportionate interest in the business of the company, but tend to be much less certain as to the precise nature of such an interest. What is clear is that, as a consequence of separate personality, the share does not represent, in any other than a very contingent way, a claim against the assets owned by the company. What shareholders possess is not a right to own and control the capital assets operated by their company, but rather a right to receive a part of the profit generated by the use of those assets. As CB McPherson put it:
"The market value of a modern corporation consists not of its plant and stocks of material but its presumed ability to produce a revenue for itself and its shareholders by its organisation of skills and its manipulation of the markets. Its value as a property is its ability to produce a revenue. The property its shareholders have is the right to a revenue from that ability."
It also has to be recognised that even this right is contingent upon the company making a profit and the directors of the company recommending the declaration of a dividend. Section 182 of the CA 1985 provides that shares are personal property and are transferable in the manner provided for in the company’s articles of association.
Changes to capital. The Companies Act 1985 lays down procedures for the alteration of a company's share capital (Section 121). In practice, most company secretaries will be involved at some time in an increase in authorised share capital either by creating new shares of an existing class or by creating a new class of shares.
When creating a new class of shares, the resolutions required to increase the authorised capital must also include a resolution to amend the Articles of Association to set out the rights and privileges differentiating the classes. Other changes to the share structure permitted by the Act are consolidation of shares; subdivision of shares, conversion of shares into stock and vice versa, cancellation of unissued shares (Section 121) and reduction of capital (Section 135). No other alterations are permitted.
One alteration which is frequently requested by directors, but not permitted, is the conversion of non-redeemable shares into redeemable shares or vice versa. This problem can usually be overcome by undertaking a re-purchase of shares by the company and by the shareholder (s) making application for the issue of redeemable shares (or vice versa) and using the consideration monies to effect the purchase.
The power to make alterations to capital must be contained in the company's Articles of Association. If no provision has been made in the Articles, they can be amended by special resolution by the company in general meeting, to enable the alteration to capital to be made. The requisite authority to alter share capital is contained in Table A, Regulation 32 and is usually incorporated in a company's Articles of Association.
The resolutions to authorise alteration of the share capital and to alter the capital can be put at the same meeting. The second resolution would have to be conditional on the first being approved or could form a sub-clause of the same resolution. The company in general meeting passes an ordinary resolution to effect the desired change in capital together with a special resolution to change the articles if required. A reduction of capital can only be carried out by a special resolution of the company and must also be confirmed by the court (Section 135).
There is also a procedure set out in the Act for a company's capital to be reorganised under a scheme of arrangement.
Procedure for increase of authorised capital. Subject to provisions in the company's Articles of Association the authorised capital may be increased by an ordinary resolution using the following procedure:
The directors, at a board meeting, resolve to recommend the proposed increase in capital, authorise the issue of a notice convening an extraordinary general meeting to pass the resolutions required and to approve a circular for issue to members explaining the reasons for the increase. Instead of convening a separate extraordinary general meeting it may be possible to include the resolutions as special business at the company's next annual general meeting. In addition to the normal requirements for listed companies to submit copies of notices, proxy forms and circulars to a Regulatory Information Service and the United Kingdom Listing Authority no later than their issue to shareholders, when changes to the company's share capital are proposed a Regulatory Information Service must be notified without delay.
A print of the ordinary resolution suitable for filing with the Registrar of Companies MUST also be prepared for signature by the chairman of the company or the chairman of the meeting.
After the resolution has been passed, a certified copy must be filed with the Registrar of Companies within 15 days together with form G123. It is also usual to send a copy of the Memorandum of Association to the Registrar with the capital clause appropriately amended. In the case of a listed company, two copies of the resolution and of the updated Memorandum, if one has been prepared, should be sent to the UK Listing Authority.
A print of the resolution must be attached to all copies of the Memorandum of Association held in stock and sent to directors and others concerned with the administration of the company (e.g. the auditors) who are in possession of copies of the company's Memorandum and Articles.
At the same time as increasing the company's share capital, it is important to give the directors authority to allot the shares and to consider whether pre-emption rights should be waived. The authority of the directors to allot shares is contained in the Articles of Association and derives from Section 80. Any existing authority whether contained in the Articles or given by resolution of the shareholders will only extend to unissued shares in existence when that authority was given or renewed. Accordingly, it is common practice for a resolution authorising the directors to issue the newly created shares to be proposed at the same meeting.
Companies whose Articles contain pre-emption provisions for existing shareholders will usually grant the directors authority in terms of Section 80 for a five-year period, the maximum period allowed under the legislation (this can be extended indefinitely by elective resolution of a private company (Section 80(A)). Listed companies usually seek an annual authority in terms of Section 80 to enable the issue of an additional one-third of the issued share capital.
Renewal or extension of this Section 80 authority requires an ordinary resolution. If the company's Articles do not contain pre-emption provisions, such authority should be limited to a relatively small amount or not given at all. By withholding authority the shareholders retain for themselves the decision on which persons may become additional members or increase their own holdings.
If the Articles do contain pre-emption rights and the share capital is being increased -with the intention of issuing shares immediately either to non-shareholders or not pro rata to existing shareholders, then the pre-emption rights may be waived by special resolution. Such waiver is normally given for a limited number of shares and for a short period of, say, one month. Listed companies normally seek an annual waiver of pre-emption rights over the issue of an additional 5% of the issued share capital.
- Consolidation of Shares
The share capital of a company may be consolidated if the Articles permit. Consolidation means that the shares of the company will be divided into shares of a larger nominal value, e.g. five shares of 10р each would be consolidated into one share of 50p each.
Consolidation does not often arise but if a company has issued a large number of ordinary shares which are below the normal denominations of 25p, 50p or £1.00 it might be found convenient to consolidate the shares. However, many companies with shares having a nominal value of 5p or 10р exist. The procedure is similar to that set out above in the case of an increase of authorised capital but certain additional matters have to be attended to, e.g. the register of members will have to be re-written so as to show the holdings of each member in the new denomination.
Form G122 "Notice of consolidation, division, sub-division, redemption or cancellation of shares, or conversion, re-conversion of stock into shares" should be sent to the Registrar of Companies within one month of the resolution being passed. It is not necessary to file a copy of the resolution passed at the general meeting if it is an ordinary resolution.
Some holdings of members will not consolidate into an exact number of new shares and those members will "lose" that fraction of their holding. In a listed company, the directors will aggregate and sell all these fractional shares on the market and distribute the proceeds to the appropriate member(s) subject to a minimum amount of, say, £3.00. Any entitlements amounting to less than this would be retained by the company. In the case of listed companies it is necessary to apply to the UK Listing Authority for the listing to be amended. Share certificates may be called in for amendment but it is more usual to send to members a notice that the consolidation has taken place and enclosing a new share certificate, all existing certificates being cancelled.
- Subdivision of Shares
Subject to provision in the Articles, an ordinary resolution of the company in general meeting may be passed subdividing the company's shares into shares of a smaller nominal amount to make them more easily marketable. This process is often referred to as splitting shares. For example, if the company has £1.00 shares quoted on the market at £10.00 each, these could be subdivided into four shares of 25p each which would then carry a market value of just 250p each. If the shares are partly paid, the proportion between the amount paid and unpaid would remain as before.
The procedure for subdividing shares is similar to that for the consolidation described above, except that fractions of shares cannot arise. Form G122 must be sent to the Registrar of Companies within one month of the resolution.
Following a subdivision, the register of members will have to be rewritten to show the number of shares held in the new denomination by each member. It would not be usual to call in share certificates for amendment and companies will usually issue new share certificates with existing certificates being cancelled.
- Conversion of Shares Into Stock
Conversion of shares into stock is rarely met with in practice since there are now no real advantages in having a company's capital in the form of stock rather than in the form of shares. It should be noted that stock-forming part of a company's capital does not include loan stock issued by the company. Prior to the Companies Act 1948, companies preferred to have stock rather than shares to avoid having to give each share a distinguishing number.
However the 1948 Act introduced provisions under which distinguishing numbers might be dispensed with where shares are fully paid.
Consequently, capital in the form of stock is only normally found in the case of companies which have been established for many years and where it is thought that the conversion of stock into shares might cause confusion or complications for stockholders. Stock that is convertible into shares under certain conditions may be issued.
Shares may be converted into stock by passing an ordinary resolution and the procedure is similar to that in the case of the consolidation of shares described above, except that fractions of shares do not arise in this case. The ordinary resolution would specify the units of stock which are transferable. Stock certificates are not called in for alteration but the holdings shown in the register of members will need to be amended. Stock cannot be issued directly, so that if at the time a company's capital is in the form of stock and it is desired to increase the capital of the company, it must first be issued in the form of shares and an ordinary resolution passed converting the shares into stock. Form G122 must be submitted to the Registrar of Companies.
Re-conversion of stock into shares. This is the reverse of the above and similarly may be effected by an ordinary resolution of the company if the Articles so permit. Form G122 must be submitted to the Registrar of Companies.
Cancellation of unissued shares. The cancellation of unissued shares, if permitted by the Articles, should not be confused with a reduction in the share capital, which requires the approval of the court. The need for cancellation does not often arise but could occur following a scheme of arrangement after the re-purchase of its own shares by the company or where the company has a class of shares none of which has been issued and which bears onerous conditions which the Memorandum of Association does not allow to be altered.
The cancellation of unissued shares may be effected by an ordinary resolution and the procedure is similar to that in the case of the consolidation of shares. Of course, in this case, amendment of the share certificates or of the company's listing does not arise. Form G122 must be submitted to the Registrar of Companies.
Reduction of share capital. Subject to authority contained in the company's Articles and confirmation by the court, a company may by special resolution reduce its capital. Confirmation by the court is required to protect the interests of the company's creditors and members (Section 135).
Three examples of undertaking a reduction are given in section 135 (2): Extinguish or reduce the liability on any of its shares in respect of share capital not paid up. Either with or without extinguishing or reducing liability on any of its shares cancels any paid-up share capital which is lost or unrepresented by available assets. Either with or without extinguishing or reducing liability on any of its shares pays off any paid-up share capital which is in excess of the company's needs.
The secretarial procedures to follow are similar to those used in a consolidation of shares with an appropriately worded resolution. The secretary will be required to give an affidavit confirming that the necessary procedures have been followed, and accordingly the date of issue of notice, date and timing of meeting should be carefully recorded. Careful attention should be paid to procedural matters at the meeting to ensure that the proceedings cannot be challenged later.
If the reduction is being undertaken for the reasons stated above and the company's share capital is divided into different classes, great care must be taken -when deciding which class, if not all, should bear the reduction. Whilst it may appear reasonable for preference shares with a limited right to participate in future profit to bear the reduction, leaving ordinary shares untouched, this is not necessarily the case. In liquidation it is the ordinary shares that rank last rather than the preference shares and accordingly it may be "reasonable" for any loss in value of assets to be borne by the ordinary shares as if in a liquidation.
Where a company has approved a resolution reducing its share capital, by whatever means, application to the court must be made for an order confirming the reduction (Section 136).
If the proposed reduction includes either the diminution of any liability on unpaid or partly paid shares or the return of monies to any shareholder or if directed by the court, any creditor of the company who would have had an admissible claim in winding-up proceedings may object to the proposed reduction. The court, will upon consultation with the directors, settle a list of creditors entitled to object, and this list, depending on the particular circumstances, may be published. After publication, any other creditor may apply to be added to the list or removed from the list. Normally the company will either discharge or make provision for the debt. If, however, the debt in whole or in part is disrupted or the company is unwilling to make a provision, the court has power to appropriate such funds as it thinks fit to meet such claims as if the company were being wound up by the court.
A reduction on the grounds of a permanent diminution of the value of the assets of the company is not subject to these provisions unless directed by the court. Upon the court being satisfied with the arrangements to protect the interests of the creditors and, if relevant, the members of the court will make an order confirming the reduction either as proposed or with any modifications deemed fit. The court -when making the order may require the company to add the words "and reduced" after its name for a specified period or require the company to publish and advertise details of the reduction so as to give proper information to the public (Section 137). The order must be submitted to the Registrar together with an amended copy of the company's Memorandum and Articles of Association and a minute showing details of the new share capital as follows:
Amount of share capital. Number of shares and their nominal amount. The amount at the date of registration of the order deemed paid up on each share.
On registration of the order and the minute, the reduction takes place and the Registrar issues a certificate of registration in respect of the order and minute. The certificate is conclusive evidence that the provisions of the Companies Act 1985 have been complied with.
Where a public company proposes a reduction of share capital that will cause its issued share capital to fall below the authorised minimum (£50,000.00 in 2002) the Registrar will not register the order unless directed to do so by the court or unless the company reregisters as a private company. The court may direct the company to be re-registered and specify the necessary alterations to the company's Memorandum and Articles of Association. In such circumstances it is not necessary for the re-registration to be approved by the shareholders (Section. 139). It is still necessary for application for re-registration to be made on form G139 (Application by a public company for re-registration as a private company following a court order reducing share capital).
- Effect of Alterations of Capital on Voting Rights
At the time an alteration of capital is made the effect that it might have on the existing voting rights of shareholders should be taken into account, so that, if appropriate, suitable action may be taken to keep the voting rights between the different classes of shares in the same proportion that applied prior to the alteration. It may be necessary to hold meetings to obtain the consent of each class of shareholder.
If the voting or other rights of different classes are being changed it will be necessary to hold separate class meetings of the affected classes in addition to the general meeting. This is so even if any particular class has no vote at general meetings. Class rights cannot be changed without approval of the class members whose rights are being changed.
- Limited Liability Company Membership
The subscribers to the Memorandum of Association are deemed to have agreed to become members of the company and on registration of the company their names should be entered in the register of members. A person may subsequently become a member by applying for new shares or by the transfer or transmission to him of shares already in issue and the entry of his name in the register of members. Thus to become a member there are two criteria: firstly that person must agree to be a member and secondly he must be entered as a member in the register of members (Section 22). Both of these requirements must be met before a person is regarded as a member of the company.
- United Kingdom Single-Member Companies
A private company need only have one shareholder and any private company may reduce its membership to one. Public companies require at least two shareholders holding between them at least £50,000.00 in nominal value of shares with each share at least 25% paid up as to its nominal value and 100% of any premium.
The Companies (Single Member Private Limited Companies) Regulations 1992, SI 1992/1699, reduced the minimum number of shareholders required for a private company from two to one. Any private company incorporated prior to the coming into effect of this statutory instrument need not amend its Memorandum and Articles of Association unless the Articles specifically state that the company must have two or more shareholders. Any rule of law requiring a private company to have two members has been modified by the statutory instrument.
It should be remembered that ANY SOLE shareholder may also be a sole director but may not also be the company secretary. Any company reducing its membership to one must, when updating the register of members, add a note stating that the company has only one member and the date on which the change occurred (Section 352). If a company with only one member increases its membership a note should be added to the register of members stating this fact together with the date on which the change occurred (Section 352).
Although the statutory instrument specifically provides that any existing enactment or rule shall apply to single-member companies with such modifications as are necessary, a new section, Section 370A, was introduced into the Companies Act 1985. This provides that notwithstanding any provision in a company's Articles, one member present by person or by proxy shall constitute a valid quorum.
Additionally, as the discipline of duly convening meetings for a single-member company is somewhat cumbersome, it is in order for a single member to take decisions normally requiring a meeting provided that any decisions are formally recorded in writing (Section 382B). Any agreements made between a single member and a sole director who is also the member MUST be set out in a written memorandum or recorded in the minutes of the next meeting of the board of directors (Section 322B).
Although this provision only applies to contracts other than in the normal course of business, to prevent any innocent omission it is recommended that a written record be kept of all contracts between the company and a sole member/director. It may also be appropriate for the director to declare his interest in the matter pursuant to the Articles of Association.
As long as there is no provision to the contrary in the Articles, any legal person such as a company may hold shares in a company. The Articles of some companies, however, exclude certain categories of person from membership, e.g. persons who are not able to give a declaration of British nationality. At the same time, it is necessary to ensure that in the case of a registered company, for example, the company's Memorandum of Association does not preclude the holding of shares in other companies.
However, an unincorporated body like a partnership, club or association not registered under the Act should not be accepted as a member of the company because it does not possess legal personality. If such a body wishes to hold shares, the shares should be registered in the name of an individual or individuals or a person having a legal personality such as a bank nominee or a trustee company.
Similarly, the holder of an office should not be accepted as a member in that capacity unless it is an office created by statute, such as the Treasury Solicitor or the Accountant General. Some public officers are legally deemed to be a corporation, e.g. the Public Trustee, and these may be registered as members of companies.
Shares should also not be registered in the name of an English partnership. They should be held in the names of two or more partners and no reference should be made in the register of members to the partnership. Scottish partnerships, however, have legal personality and may, therefore, be registered in the firm name as members of the company. Shares held by a limited liability partnership (L.L.P.) can be registered in the name of the limited liability partnership, as it is a corporate body with a legal persona. Shares in a company may be held by a number of persons in a joint account. However, some Articles of Association limit the number of persons who may be so registered. In the case of a listed company, the maximum number of joint holders is set at not fewer than four.
Unless a subsidiary company is acting only as personal representative or trustee without having any beneficial interest in the shares, a subsidiary company is not permitted to be a member of its holding company (Sections 23 and 143). There is, however, no prohibition on the holding of shares by a subsidiary in its holding company if it held shares in the company which acquired it (which thereby became its holding company) prior to its becoming a subsidiary of that company. However, in this case the subsidiary is not permitted to vote at meetings of the holding company (Section 23(5)). Of course, it would not be lawful for any further shares in the holding company to be allotted to such a subsidiary company, a situation which could arise if the holding company had a capitalisation issue.
- Minors as Members of a Company
Since becoming a member of a company involves the assumption of liabilities in respect of the shares held, it is not considered good practice to accept minors as members of a company in their own name as their responsibilities in respect of those liabilities would be voidable during their minority. Their minority is while under the age of 18 in England, Wales and Northern Ireland; see below for details of the position in Scotland.
This especially important where the shares may be partly paid, which imposes an obligation to pay any calls that may be made by the directors. The Articles of Association may give express power to reject allotments and transfers in the name of a minor, but if not, a right of rejection is conferred by general law. Accordingly, the company may repudiate the contract for the allotment of new shares and in the case of a transfer the transferor may be re-instated as the holder of the shares.
It may only come to light at some later stage that a minor is a member of the company and until any repudiation or rejection of their membership any minors can enjoy the full rights of membership. Rejection of a minor can only take place during that person's period of minority. The Listing Rules require that the articles of association of a listed company contain no restrictions on the transfer of fully paid shares, although the right of rejection is maintained under the general rule of law. From a practical point, especially for listed companies, minors may well become members of the company without the company's knowledge.
Any member transferring shares to a minor, even in ignorance, is liable for any future calls on those shares whilst the minor is still the registered holder and a minor. Any person who procures the acquisition of shares and their registration in the name of a minor makes himself liable to indemnify any transferor in respect of any future calls.
In Scotland persons are pupils until the age of 12 (girls) and 14 (boys), after which they become minors until the age of 18. Pupils have no capacity to contract, although their guardian (tutor) may contract on their behalf. Minors who live independently and hold themselves out as having reached the age of 18 have the capacity to contract. If a minor has a guardian (curator), contracts will normally only be made with that person's approval.
A pupil or minor who validly acquires shares is able to reduce (cancel) the contract not only whilst still a pupil or minor but also until the age of 22 (this additional age limit does not apply to business contracts). In order to reduce the contract the pupil or minor only has to show that the contract was unreasonable.
- Allotment
Authority for allotment. Relevant securities in a company may not be allotted unless the directors are authorised to do so by an ordinary resolution of the company or by the Articles of Association in terms of Section 80. The authority may be given in general terms or made subject to conditions but must state the maximum amount of the relevant securities that may be issued and specify the date on which the authority will expire. In the case of a public company, authority may only be given for a maximum of five years from the date of the resolution (Section 80(4)). In the case of a private company authority may be given for an indefinite period or until a stated fixed expiry date (Section 80A(2)).
Companies with few shareholders will often adopt the longest period permissible and to safeguard existing shareholders will ensure that any shares allotted must be offered to them as discussed below. Those companies with a large number of shareholders, and listed companies, will renew the authority usually, in the case of listed companies for an additional one-third of the issued capital for a period ending on the day of the next annual general meeting or 15 months from the date of the resolution.
Relevant securities are defined in the Companies Act 1985 as shares (other than those taken by subscribers to the memorandum or allotted under an employees' share scheme) and securities giving a right to subscribe for, or convert into, shares of the company.
The authority to allot relevant securities may be revoked, varied or renewed by ordinary resolution even if the authority was given by a special resolution or contained in the Articles of Association. A resolution renewing an earlier authority must state the amount of shares which may be allotted and an expiry date, within five years for a public company, or if it is a private company that the authority is given indefinitely. Authority can only be given for shares forming part of the authorised share capital of the company at the time of the resolution. Securities may be allotted after the expiry of the authority provided that the allotment is in pursuance of an offer or agreement made prior to the expiry of the authority. A copy of a resolution giving authority to directors to allot relevant securities must be filed with the Registrar of Companies within 15 days after it is passed.
Pre-emption rights. It is quite common for the articles of private companies to provide that, where new shares are to be allotted, they must first be offered to existing shareholders in proportion to their existing holdings. In the case of a listed company, the UK Listing Authority requires that any new issues of shares for cash should first be offered to existing holders as in a rights issue.
Pre-emption rights for existing shareholders in respect of the allotment of equity securities is now provided by statute in Sections 89 to 94 even though there may be no special provisions in the Articles of Association. These provisions may be excluded by the Articles or by special resolution of the members.
Equity securities are defined in Section 94 as relevant shares in the company, i.e. basically the ordinary share capital of the company on which the rate of dividend varies according to the profits of the company and which carry no preferential right in the repayment of the capital in the event of winding up. Securities which may be converted into relevant shares (i.e. convertible loan stocks) are also included but the following are excluded: shares taken by subscribers to the memorandum. Shares which as regards dividends and capital carry right to participate only up to a specified amount in a distribution. Shares held by a person acquired through an employees' share scheme or which are to be allotted in pursuance of such a scheme. Shares allotted under a capitalisation issue. Shares allotted wholly or partly paid otherwise than in cash.
Any pre-emption rights contained in a company's Memorandum or Articles of Association take precedence over the statutory pre-emption rights. The requirement of the Companies Act 1985 is that no equity securities may be allotted unless they have first been offered to the holders of all the relevant shares in the company in proportion to their existing shareholdings, and this includes holders of any shares under an employees' share scheme. The detailed provisions -with regard to the communication of the offer to the existing shareholders, who must be given a period of not less than 21 days in which to accept the offer, are laid down in Section 380(4). A record date to determine the holders entitled to receive the offer must be set within a period of 28 days before the date of the offer.
In the case of share warrants to bearer, the offer must be made by advertisement in the London Gazette or Edinburgh Gazette stating how copies of the offer may be received. It is normal practice to place an advertisement in a national newspaper as well. The company and every officer who knowingly permits an allotment of shares to be made in contravention of the statutory pre-emption provisions are jointly and severally liable to compensate any person who may suffer loss as a result.
Disapplication of pre-emption rights. Private companies may exclude the statutory provisions by provisions contained in their Memorandum and Articles. These will prevail even if they are inconsistent with the statutory provisions.
It is also possible for both public and private companies to exclude the operation of the statutory pre-emption rights in Section 89 if the directors obtain authority by a special resolution of the company passed at a general meeting or, alternatively, by a provision in the company's Articles.
If the company's Articles do not already contain a suitable provision, an alteration to the articles would be necessary and would require the approval of shareholders by special resolution in a general meeting. In the case of a listed company, unless shareholders in general meeting otherwise permit, or the company has a general authority to disapply pre-emption rights under Section 95 granted not more than 15 months previously, a company must first offer securities having an equity element, to be issued for cash, to the existing equity shareholders of the company in proportion to their existing holdings. The statutory right for the disapplication of pre-emption rights is contained in Section 95. It is also quite common for the special resolution required by Section 95, giving the directors power to disapply the Act's requirements with regard to pre-emption rights in regard to the allotment of securities up to a limit specified in the resolution, to be proposed as part of the regular business at the annual general meeting of a listed company. In most cases, listed companies will seek authority in terms of Section 80 for the issue of up to an additional 30% of the issued shares capital and the waiver of pre-emption rights of up to an additional 10% of the issued share capital.
The grant of the power to directors to disapply the pre-emption rights makes it possible for the company to make a rights issue of its shares and exclude or make such other arrangements as may be appropriate to resolve legal or practical problems, rendering it impossible to allot equity securities to all shareholders of the company in proportion to the respective numbers of shares held by them. This arises because in some countries (e.g. the United States) it would not be possible to offer the securities to residents of those countries without going through lengthy and costly procedures required by the local legislation. The rights of the persons concerned would, whenever practicable, be sold for their benefit. Circumstances may also arise where the company might wish to make small allotments of equity shares for cash to persons other than existing shareholders.
The disapplication of the pre-emption rights would cease when the general authority of the directors to issue equity securities under Section 80 lapsed. However, an offer made before the expiry of the authority to disapply the pre-emption rights would remain valid notwithstanding the fact that the actual allotment did not take place until after that date.
Allotment procedure. The required steps are as follows: it may be necessary for the authorised capital of the company to be increased because the present unissued authorised capital is insufficient to cover the proposed allotment. The person wishing to subscribe for shares completes a form of application and returns it with the required payment.
A share certificate is then prepared for each applicant on the company's printed share certificate forms. In the case of small companies, blank certificates for completion by hand may be obtained from law stationers. In many cases, a stock of such certificates is included in the combined statutory registers supplied upon incorporation by the registration agents.
The directors should pass a resolution to allot the shares to the persons applying for them, and if the company has a seal, authorise the sealing of the share certificates, and their issue to the applicants. The share certificates after sealing (if appropriate) are sent to the applicant informing him of the allotment. All these steps should be taken as soon as possible since until the applicant is notified that his application for shares has been accepted he is free to withdraw it. In the event the company is required to issue certificates within two months of allotment.
The names of the persons allotted shares are then entered in the register of members of the company and they thereupon become members of the company. Return of allotments on Form G88(2) must be filed with the Registrar within one month of the date of allotment.
Valuation of non-cash consideration. A public company is prohibited from allotting shares either fully or partly paid up as to nominal value or premium for a consideration other than cash unless the consideration has been valued by an appointed valuer within the six months prior to the allotment and a copy of the valuer's report has been sent to the proposed allottee of the shares (Sections 103,108 and 112).
There is, however, exemption from this provision in the following cases: allotments of shares made in a takeover bid by way of share exchange if the offer is open to all holders of the class of shares concerned. Where the shares are allotted under a capitalisation issue by the capitalisation of reserves or sums standing to the credit of the profit and loss account.
The valuation report must be made by an independent person who would be qualified to be an auditor of the company, unless he considers that it would be appropriate for some other person with the required knowledge and experience to make the report. That person should not be an officer or servant of the company.
The valuer's report must state the following: the nominal value of the shares being allotted wholly or partly paid for a consideration other than cash. The amount of any premium payable on the shares. The consideration which has been valued and the method used to value it. The amount of the nominal value of the shares and any premium treated as paid up for a consideration other than cash.
If the person appointed to make the valuation has appointed someone else to make it, the valuer's report must mention this and state: the name of the other person with details of his knowledge and experience. A description of the consideration that was valued by the other person and the method used to value it.
The report must include a statement that the value of the consideration, together with any cash that may be payable, is not less than the amounts of the nominal value of, and premium on, the shares which are to be treated as paid up by the consideration of other than cash and that there has been no material change in its value since the date of the valuation.
A copy of the report must be sent to the Registrar of Companies when the return of allotments is filed. The person making the report is entitled to call for such information from officers of the company as he may require and it is an offence for misleading or false information to be given (Section 110). It is also an offence to contravene the above requirements for the allotment of shares for a non-cash consideration, including failure to send the allottee a copy of the report. The allottee and any subsequent holder of the shares will be liable to pay the company the amount equal to the nominal value and premium treated as paid up for a consideration other than cash on the shares allotted to him if he knew, or should have known, of the contravention. A subsequent holder of the shares, purchasing the shares for value without knowledge of the contravention, will not be liable and will also not be liable if the previous holder was not himself liable.
- Procedure for the Transfer of Non-Cash Consideration
Usually, a formal contract is entered into for the transfer of the non-cash consideration to the company and for the allotment by it of shares in consideration for the assets transferred. This formal contract should be approved by the board of directors. The agreement MUST be duly stamped and sent to the Registrar of Companies with the return of allotments. This should be accompanied by a certified copy of the agreement if the Registrar is to be requested to return the original agreement.
If there is no written contract, particulars of the agreement must be set out on Form G88(3) "Particulars of a contract relating to shares allotted as fully or partly paid up otherwise than in cash", bearing the same stamp duty as would be payable on a written contract. This must be sent to the Registrar with the return of allotments.
Shares for a non-cash consideration may also be issued on a capitalisation of reserves, the return of allotments being made on Form G88(2) with the particulars of the contract on Form 88(3), which in this case need not be stamped.
It will be seen that the issue of shares for a consideration other than cash involves certain formalities and expense and arrangements may be made for the transaction to be structured so as to constitute an allotment for cash.
Allotments by public companies. Special provisions apply in the case of issues of shares to the public by public companies. These are as follows: an allotment cannot be made unless the amount stated in the prospectus as the minimum amount required to be raised has, in fact, been subscribed and the sum payable on application for the shares concerned has been received by the company. There can be no allotment if the amount of capital offered for subscription is not fully subscribed, unless there is an express term in the offer that an allotment may be made notwithstanding that there has not been a full subscription. This applies both in the case of offers of shares for cash and offers of shares for a consideration other than cash.
If the above two requirements are not met the cash subscribed or other consideration paid must be returned to the applicants.
- Nominee Shareholding
These arise where the beneficial owner of shares does not wish to have them registered in his own name. The shares may be registered instead in the name of a person or group of people or a company (the nominee). The beneficial owner of the shares has no contact with the company since the company has to address all communications to the registered shareholder, in this case the nominee. There must also be no reference in the company's register of members to the identity of the beneficial owner, since by Section 360 a company is not permitted to recognise any trust affecting any of its shares.
This rule is not contravened if a company accepts a body corporate as a shareholder with the word "nominees" or "trustees" in its name. At the same time, notwithstanding Section 360, public companies are required to keep a register of persons who have a beneficial interest in 3% or more of the company's share capital, which must be notified to the company within two days of the interest being acquired (Sections 199(2) and 202 as amended by CA1989, Section 134). The company is entitled to make enquiry under Section 212 of any registered shareholder, which may be a nominee or trustee company, as to the person or persons beneficially interested in the shares it holds. Section 360 does not apply in Scotland.
The need for a nominee shareholding can arise in the case of wholly owned subsidiary companies if the Articles require two or more shareholders, or the company is a public limited company. In practice, one or more of the shares in the subsidiary must be registered in the name of a nominee on behalf of the company. This requirement is often met by arranging for one share to be registered in the joint name of a director of the holding company as the first-named holder and the holding company as the second-named holder. The second shareholder, i.e. the holding company, would hold the balance of the shares in the subsidiary company.
The nominee should provide a dividend mandate requesting that all dividends be paid to the holding company and should also execute a transfer of the shares, the name of the transferee and date being left blank so that if the director were to leave the company it would be possible for his nominee share to be transferred to another director who remained a director of the holding company. A short declaration of trust should also be executed by the director declaring that the share he holds is held by him as a nominee for the holding company and that he has no beneficial interest in it. The declaration of trust will often include the following provisions:
The nominee will pay any dividends on the shares as the beneficial owner may direct. The nominee will transfer or deal with the shares as the beneficial owner may direct. The nominee will vote at general meetings as the beneficial owner shall direct, or execute proxies as required, and if any rights or options should be offered to him as holder of the nominee share, he will act in relation to the offer as directed by the beneficial owner.
If the declaration of trust is executed there is no need for a blank transfer or dividend mandate. However, it may still be prudent to obtain a blank transfer already signed by the nominee in case he is dismissed by the company and is unwilling to co-operate in giving up the nominee shares.
When a subsidiary company's Articles are being changed, if it is a private company the opportunity should be taken to remove any provision requiring the membership of the company to be two or more. This will enable the subsidiary to take advantage of SI 1992/ 1699 which allows private companies to have a sole shareholder.
- Payment for Shares
There are two ways in which shares may be paid for: In money or money's worth, including goodwill and know-how. By way of capitalisation of the company's existing reserves. The following methods are prohibited:
Payment for shares or any premium on them by a person undertaking to do work or perform services for the company or any other person.
The allotment of shares at a discount, i.e. at an issue price for a share below its nominal value. However, a company may pay commission as consideration for a person subscribing or procuring the subscription for shares in the company since this is not treated as a discount. Shares may not be allotted by a public company (other than under an employees' share scheme) unless at least one-quarter of their nominal value and the whole of their premium is paid up.
Public companies may not allot shares as fully or partly paid up (both as to their nominal value and any premium on the shares) if the consideration for the allotment includes an undertaking which is to be, or may be, performed more than five years after the date of the allotment. If an allotment is made for a consideration which includes an undertaking to be performed within five years and the undertaking is not performed within that period the allottee of the shares becomes liable to pay the company an amount equal to the agreed price for the shares, which was to be treated as paid up by the undertaking, with interest.
Shares taken up by a subscriber to the Memorandum of Association of a public company must be paid for in cash, both as to nominal value and any premium. Subsequent holders of shares may incur liability if any of the above provisions relating to the payment for shares are contravened.
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£ 100.00
Corporate Nominee Shareholder Service for Public Records for one year:
A nominee is normally a company created for the purpose of holding shares and other securities on behalf of investors.
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