Rules Surrounding Share Capital

What is the Significance of Share Capital?

With any limited company that is limited by shares there are going to be issues surrounding the chosen share capital. Typically and in basic shelf companies there will be 100 shares of £1 available and these will be issued to the founding share holders in whatever proportion is required. Shareholders are essentially the owners of the company and therefore the split of the shares is critical in dictating who owns what proportion of the company.

The shares are also an indication of who has the rights to make decisions over the company. Typically this offers opportunities through the use of share capital arrangements to determine different rights in terms of dividends or voting rights. Protecting these rights is therefore often central to the operation of the organisation. Share capital is also used as a way of protecting creditors as the level of shareholding indicates the amount of money in the company to pay off debts.

Maintenance of Capital

The share capital of a company is the property of the company and not the shareholders. When shareholders pay for shares at whatever value, the amount is then paid into the company and therefore it is the company’s responsibility to maintain this capital. The principle of maintaining share capital is therefore essential to the protection of creditors as if the share capital could be reduced at any point it would be detrimental to those forwarding credit to the organisation.

As a result there are rules in place that will allow money to be paid back to shareholders and a reduction of share capital in limited circumstances only. These have been simplified under the 2006 Act to allow private companies to undertake the process without court approval. There are of course greater control on public companies.

Essentially in order to reduce the level of capital it will be necessary for the directors to give an assurance of liquidity to the creditors going forward. Where this guarantee is given and the company later folds, it is possible for the creditors to personally claim any losses against those directors that made the false declaration.

Alterations of Share Capital

Share capital can be changed within the structure of the company at any point and for a wide range of reasons. Since the 1st October 2009 there have been limits placed on the way in which the share capital can be altered with a limited company. These provisions are contained in parts 17 and 18 of the 2006 Act and are now relevant for all companies formed after this date. Transitional arrangements are in place to deal with companies formed prior to this date.

Limited companies are able to alter their share capital in several ways namely, increasing their share capital by allotting shares that are new to either existing shareholders or new shareholders. Share capital may also be reduced, subject to certain rules as stated above. Shares can also be sub divided or consolidated as required and new share classes can be established again either for current shareholders or for new shareholders. This type of process is particularly useful where there is a desire to have different voting rights or rules attached to a class of shareholder.

Allotment of Shares

Under the 2006 Act the notion of having authorised share capital has been removed. This means that when a company looks to allot shares they no longer have to look at whether or not there is a sufficient authorised share capital available from which to allot the shares. There are still requirements that need to be followed when allotting shares although these are not as great as they were previous to the 2006 Act coming into play.

Any company that only has one class of shares can, provided there is nothing to the contrary in the articles of association allot shares without the need to get approval from the members. This gives full authority to the directors to allot as they see fit.

Directors can allot shares where there is more than one class of shares where there is prior approval of the shareholders through an ordinary resolution or where it is stated as allowed in the articles of association. Public companies have a much wider range of requirements placed on them, primarily contained in the listing rules.

Other Issues with Share Capital

Pre-Emption Rights

A right is given to shareholders to have a first refusal over any new shares that are being allotted by the directors. This is to ensure that the existing shareholders do not see their share holding being diluted by directors simply allotting more shares to other shareholders. These pre-emption rights can be written out of the articles but should be considered as part of any shareholder arrangement and in particular as part of the shareholder agreements.

Share Buy-backs

In a similar way to the generic area of reduction of capital, any form of share buy back by the company needs to be considered carefully with the directors offering statements of solvency to support and protect the creditors.

Types of Rights Attached to Shares

  • Some shares may have voting rights that others do not, or enhanced voting rights when certain decisions are being made.

  • Shares may derive dividends or may not depending on the rules attached.

  • There may also be differences in terms of transfer provisions with limits being placed on certain shareholder classes.