A key way for a private company to raise finance, whether for expansion or business development, is by the allotment and issue of new shares. There are some key considerations and legislative framework for any share allotment.
Generally, the allotment process is similar for all private companies, however there may be additional steps for companies which were incorporated under the Companies Act 1985 (“CA 1985”) or earlier Companies Acts.
1) Incorporation & Constitutional Documents
The first step in an allotment is to check your company’s constitutional documents, including its Memorandum (if the company was incorporated under CA 1985 or before), Articles of Association and any Shareholders’ Agreement.
Your company’s constitutional documents govern what the directors can and cannot do and this includes the allotment of shares.
2) Authorised Share Capital
Although ‘Authorised Share Capital’ is no longer a concept recognised under the Companies Act 2006 (“CA 2006”), it may still be significant for a company incorporated under the CA 1985 or earlier.
If your company’s Memorandum states the authorised share capital, and this has not been subsequently removed or amended, then the authorised share capital will continue to act as a limit on the number of shares that the company can issue.
3) Do the directors have the authority to allot new shares?
If your company was incorporated under the CA 2006 and has only one class of shares, the directors have the power to allot new ones without getting any further authority from the shareholders (see s550 CA 2006), unless they are prohibited from doing so by the company’s articles of association.
Companies incorporated under the CA 1985 or earlier must pass an ordinary resolution, giving the directors authority to allot.
If your company has more than one class of shares, then the directors will need to get express authority from their shareholders by means of an ordinary resolution to allot further shares. This can be obtained at a general meeting or using the CA 2006 written resolution procedure.
4) Are there pre-emption rights (statutory or constitutional) that are enforceable?
Pre-emption rights are where any new shares to be allotted must be offered first to existing shareholders in the company; they have a right of first refusal.
Check your company’s articles of association. Are the statutory rights excluded or dis-applied?
- Private companies can exclude the application of the statutory pre-emption right by an express provision to that effect in their articles of association.
- Alternatively, directors of a company can disapply or modify the statutory pre-emption right by passing a special resolution. Remember, if the statutory pre-emption right is disapplied by a resolution, a copy of the resolution must be filed at Companies House within 15 days.
Be careful to ensure that the statutory pre-emption regime is followed if applicable.
5) Registration & Filing
Registration of an allotment is important.
The new shareholder(s) will not hold the allotted shares or be a member of the company, until the registration process is complete.
- The company’s Register of Members needs to be updated;
- The company’s PSC Register may also need to be updated depending on whether the allotment involves a change in the company’s PSC position;
- Various documents will need to be filed at Companies House, including:-
- an SH01 form; and
- any shareholder resolutions (passed at a meeting or using the written resolution) required for the allotment.
Should you require any further information, please get in touch with your usual Brodies contact.
On December 5, 2019