Due diligence checklist: business purchase

When do I use this document?

• to sub-divide issued shares into a larger number of shares
• to consolidated issued shares into a smaller number of shares
• typically, on closing of an investment transaction or in connection with an issue of new shares
• if the resolution is to be approved at a general meeting, in conjunction with our template general meeting notice Shareholder meeting notice

What are the key features?

• ordinary resolution to be passed as a written resolution
• alternative forms of the resolution depending on whether the issued shares are being sub-divided or consolidated

What else do I need to know?

A private limited company can alter its share capital in various ways, including:

• sub-division: sub-dividing issued shares into shares of a smaller nominal amount
• consolidation: consolidating issued shares into shares of a larger nominal amount

Other types of share capital alteration include the allotment of new shares, reduction of capital, redemption or purchase of own shares and converting issued shares into shares of a different class.

Why would a company sub-divide shares?

Companies are often incorporated with a small number of ordinary shares.  If the company plans to issue new shares, such as during an investment round, it may need to sub-divide the existing shares so that the numbers and percentages align with the investment terms.

For example, a company incorporated with 2 shares of £1.00 each will need to sub-divide them if it receives investment for 20% of the enlarged share capital. 

To achieve the correct percentage shareholdings, one way of doing this would be to sub-divide the existing 2 shares of £1.00 each into 4 shares of £.0.50 each.  The investor could then subscribe for 1 share of £0.50 and would own 1 out of the 5 shares in total, equal to 20% of the enlarged share capital.

Another idea would be to sub-divide the existing shares into a much smaller nominal share value as this will facilitate future shares issues and share transfers.  

How does a company sub-divide its shares?

Sub-dividing shares requires an ordinary resolution of shareholders unless the Articles of Association exclude or restrict this.  If such exclusions or restrictions exist, the Articles must be amended by special resolution to disapply the exclusion or restriction.  After passing the ordinary resolution, the company will need to file Companies House Form SH02 within one month.

Why would a company consolidate shares?

Share consolidation is the reverse of sub-division, where a specified number of existing shares are consolidated into a single share or fewer shares.

Private limited companies are less likely to carry out a consolidation than a public company, which may do this to increase its traded share price or perhaps to reduce the number of shareholders on its register.

If a private company wished to consolidate its share capital, this requires an ordinary resolution of shareholders, unless the Articles of Association exclude or restrict this right.  After passing the ordinary resolution, the company will need to file Companies House Form SH02 within one month.