Rules surrounding share capital

Share capital is the money invested in a company by the shareholders. Shareholders gain a share of the ownership of the company in exchange for their investment. The split of the shares dictates who owns what proportion of the company.

The amount of shares held also stipulate who has the rights to make decisions over the company and the amount of dividends that can be drawn. 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 the amount is then paid into the company and it is the company’s responsibility to maintain this capital.

Under the Companies Act 2006 (CA 2006) a private company limited by shares may reduce their share capital by passing a special resolution backed by a solvency statement. This is where the directors give an assurance of liquidity to the creditors. Where this guarantee is given, if the company later folds, the creditors can claim any losses against directors that made a false declaration. Limited companies may also reduce their share capital by passing a special resolution that is confirmed by court order.

Alterations of share capital

Limited companies can increase 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 under CA 2006. 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 useful where there is a desire to have different voting rights or rules attached to a class of shareholder.

Allotment of shares

Under CA 2006, a company that was incorporated after 1 October 2009 and 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. Directors of companies incorporated before 1 October 2009, however, need approval from the members.

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

Shareholders have a first refusal right over any new shares being allotted by the directors. This is to ensure the existing shareholders do not see their shareholding 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 shareholder agreement.

Share buy-backs

Any 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.

Article written by...
Nicola Laver LLB
Nicola Laver LLB

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A non-practising solicitor, Nicola is also a fully qualified journalist. For the past 20 years, she has worked as a legal journalist, editor and author.