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.

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For more information on:

  • Allotment of Shares
  • Other Issues with Share Capital
  • Pre-Emption Rights
  • Share Buy-backs
  • Types of Rights Attached to Shares