The process for a private limited company to issue new shares involves both commercial considerations and compliance with legal requirements. As for the transfer of existing shares, this process can be more involved than first thought. This article considers the key factors to consider and the legal steps required for issuing new shares.
Reasons for issuing new shares
There are various reasons why a company may need or wish to issue new shares. Common reasons include:
- To raise money, either from existing shareholders or new investors
- To introduce a new shareholder into the business without raising capital
- To fund the acquisition of another company or business by issuing shares to the seller(s)
- To satisfy share options exercised by employees or others
Initial considerations when issuing new shares
Before issuing shares, the company must consider several initial matters:
Number and price of shares
If the shares are being issued for investment purposes, a pre-investment valuation will be required to determine the company’s value. This will enable a calculation of what percentage of the company the investor(s) will own in exchange for their investment, the number of new shares which will need to be issued and the issue price per share.
In cases where shares have beed issued to satisfy employee option exercises, the price and number of shares will usually have been predetermined by the terms of the options at the time of their grant, often years earlier.
Class of shares
Will the new shares be the same class of share as existing issued shares or will they have different rights?
New investors often seek preferential rights, such as priority on dividends or on proceeds in the event of a company sale or other return of capital (a liquidation preference).
Shares issued to employee shareholders are often non-voting shares.
If there is to be a new class of share, this will necessitate changes to the company’s Articles of Association to specify the share rights and shareholder resolutions to approve the changes and class rights.
Shareholder engagement
Unlike the transfer of shares already in issue, the new shares will increase the total number of shares in issue. Unless existing shareholders take these up in the same proportions as their current shareholdings, the new share issue will dilute their shareholdings. Certain elements of the share issue process may also require the approval of current shareholders, including for the creation of a new share class, the grant of authority to the directors to issue new shares and the waiver of pre-emption rights. Engaging with existing shareholders is crucial to ensure the company has their support and that they will cooperate when required with the necessary legal actions.
Tax
It is worth checking with the company’s accountants or other tax advisors whether any tax implications will result from the new share issue. This is especially relevant where the recipient(s) of the new shares are either employees or directors of the company or its subsidiaries. The good news however is that (unlike for a transfer of existing shares) there is no stamp duty payable on the issue of shares in a UK company.
Legal considerations when issuing new shares
Before issuing shares, a number of legal matters will also need to be checked and addressed
where necessary.
Directors’ authority to allot shares
The directors of a company must have the authority to issue shares. For a company incorporated under the Companies Act 2006, if there is only one class of share and there are no restrictions on the directors’ authority to issue new shares in the Articles of Association, the directors are likely to have automatic authority to issue new shares without the need for shareholder consent. Otherwise, the directors may need shareholder approval by way of ordinary resolution (simply a majority vote) to grant the necessary authority to allot shares. Alternatively, any restrictions in the Articles of Association will need to be removed by special resolution of shareholders (75% majority vote).
Pre-emption rights
Existing shareholders may have rights of first refusal (pre-emption rights) on the issue of new shares. These rights could be set out either in the company’s Articles of Association or a shareholders’ agreement. Before issuing new shares, these rights must either be complied with by offering the new shares first to the existing shareholders in proportion to their shareholdings or waived. The pre-emption rights provisions may specify how they can be waived, which may require a special resolution of shareholders. Alternatively, the express written consent of each shareholder who benefits from the pre-emption rights may be required.
Statutory pre-emption rights
The Companies Act 2006 also provides statutory pre-emption rights for the benefit of existing shareholders unless these rights have been disapplied in the Articles of Association. However, these rights would not apply in certain situations, such as for shares issued under an employee share scheme or for shares which are being issued for non-cash consideration. If not already disapplied in the Articles of Association, this can be done either by amending the Articles of Association by special resolution or by special resolution for a specific share allotment.
Restrictions in the Articles or shareholders’ agreement
Specific provisions in either the Articles of Association or a shareholders’ agreement (as a reserved matter) may require the consent of particular shareholders before new shares can be issued. If such
provisions exist, written consent will need to be obtained by the terms outlined in those provisions.
Legal documentation required to issue new shares
Once the legal issues, outlined above, have been checked and complied with, the necessary legal documents for the share issue can be prepared. These typically include:
- A subscription letter from the new shareholder
- In the case of an investment transaction, an investment agreement or subscription
agreement and possibly also a new shareholders agreement - Where there is an existing shareholders’ agreement, a deed of adherence from the new
shareholder(s), under which the new shareholder(s) undertake to be bound by the
shareholders agreement - Board resolutions to approve the share allotment, the update of the company’s
statutory registers of allotments and members and to authorise the issue of new share
certificates - New share certificates for the issued shares
- Updates to the company’s statutory registers of allotments and members
- Filing Companies House Form SH01 and updating the company’s People with
Significant Control filings at Companies House, if applicable.
Summary
In conclusion, issuing new shares in a private limited company is a complex process that requires careful consideration of commercial goals and legal obligations. From determining the appropriate number and class of shares to navigating pre-emption rights and directors’ authority, each step must be carefully managed to ensure compliance with the company’s internal regulations and statutory requirements. Whether raising capital, introducing new shareholders, or satisfying employee options, companies must prepare the necessary legal documents and ensure all stakeholders are adequately informed and engaged. With the right approach, issuing shares can be an effective tool for business growth and shareholder value.
PaperRock document templates
We have template documents for issuing new shares, including all necessary
documents and corporate resolutions. See our section Issue of Shares.
We also has a full suite of the legal documents for an investment transaction involving
the issue of new shares. See our section Investing in a Company.
For information about the process and legal requirements for the transfer of existing shares in a
private limited company, see our article Transferring Shares In A Private Ltd Company.
