Company Law - Shares and Dividends (Part 1)

Introduction – the alteration of share capital

Even once a company is up and running, it may desire to alter its share capital. There are two primary ways in which this can take place: an increase of share capital, or a reduction of share capital

Increase of share capital

The company may wish to increase its share capital in order to attract further investment and expand. Although this is a perfectly legitimate action, there is the possibility that this could be abused.

Increase of share capital

The first step in issuing extra shares is to identify whether there are any authorised, unissued shares. If there are not, then it becomes necessary to increase the authorised share capital of the company:

s.121 (1) Companies Act 1985: “A company… if so authorised by its articles may… (a) increase its share capital of such amount as it thinks expedient”.

Art.32 Table A: “The company may by ordinary resolution (a) increase its share capital… of such amount as the resolution proscribes”.

s.617 Companies Act 2006 provides a similar mechanism.

Give the directors the power to allot the shares

Once there are authorised, unissued shares available, it becomes necessary to give the directors the power to issue (or allot) them.

s.80 (1) Companies Act 1985: “The directors… shall not exercise any power… to allot… unless they are authorised to do so by (a) the company in a general meeting; or (b) the company’s articles”.

s.80 (4): “The authority must state the maximum amount… that may be allotted, and the date on which it will expire, which must not be more than 5 years”.

Similar provisions are found in s.551 Companies Act 2006.

Pre-emption rights

A danger of issuing shares to new members is that the existing members may lose their influence within the company. For example, if a member holds 75 out of 100 shares, they will be in a position to pass both ordinary and special resolutions. However, if a further 100 shares are issued to others; suddenly the member will only hold 75 out of 200 shares, meaning they will not even have sufficient influence to pass an ordinary resolution.

In order to combat this danger, the companies legislation provide for rights of pre-emption – essentially, that if new shares are to be issued, they should first be offered to existing members in proportion to their existing shareholding to at least give them the opportunity to preserve their voting power.

s.89 (1) Companies Act 1985: “A company proposing to allot equity securities:

(a) shall not allot any of them… unless it has made an offer to each person who holds relevant shares… to allot to him on the same or more favourable terms a proportion of those securities which is as nearly practicable equal to the proportion… held by him;

(b) shall not allot any of those securities… unless the period [21 days] during which any such offer may be accepted has elapsed”.

Similar provisions are found in s.561 Companies Act 2006.

Removal of the right to pre-emption

It may be that members do not wish to purchase additional shares, and indeed may be inexpedient to wait for the 21-day period to expire. As such, it is possible to remove the right of pre-emption:

s.95 Companies Act 1985: “[directors] may be given power by the articles or by special resolution to allot [shares] as if… s.89 (1) did not apply”.

A similar provision is found in s.570 Companies Act 2006.

Issue shares

At this point, there are unissued shares available, the directors have the authority to allot them, and there is no need to offer them to existing members. Therefore, the directors may by ordinary resolution resolve to issue the shares.

See further, textbooks:
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