14 May 2018 by Lorraine Young
Reviewing authority to allot, pre-emption rights, consideration and listing requirements
An allotment of shares can be effected by a simple board resolution. However, the law in this area can be quite complex and on occasion it may be necessary to take advice, especially as penalties can apply if the rules are not followed.
Important points to review include: authority to allot and pre-emption rights; consideration, whether cash or non-cash; and listing requirements.
The provisions of the Companies Act 2006 (CA2006) and the company’s articles will be relevant and should be checked in advance. For companies where there is a shareholders’ agreement in place, this should also be checked carefully to see if there are any provisions or restrictions on allotment.
Although the directors allot new shares – or securities convertible into shares – or grant any right to subscribe for shares, in most cases shareholder authority is required before this can be done (see s549 CA2006). This also applies to the sale of treasury shares.
However, it does not apply to subscriber shares, the allotment of shares (or the grant of rights to subscribe for, or convert securities into, shares) under an employees’ share plan or the allotment of shares under rights to subscribe for, or convert securities into, shares.
The simplest case is for a private company formed after 1 October 2009, with only one class of shares. For such companies, there is no restriction on the number of shares which the directors can allot and no shareholder authority is necessary – unless there are restrictions in the articles (s550).
“The authority granted may be general or specific”
For private companies set up before this date, for those set up after 1 October 2009 but with more than one class of shares or for public companies, shareholder authority will be needed (s551). The articles may contain such an authority but if they do not or if the authority has expired then an ordinary resolution of shareholders is required to allow the allotment.
The authority granted may be general or specific, it must state the maximum number of shares that may be allotted under it and the date on which it will expire – a maximum of five years after it is granted.
For listed companies, such a resolution is normally passed at every annual general meeting (AGM) – this is to cover routine allotments that are likely to occur during the next year. The usual practice is to allow directors to allot up to a third of the current issued share capital and the authority will normally last for one year, until the next AGM, when a new authority will be sought.
The authority can be revoked, renewed or varied by an ordinary resolution. The resolution may permit allotments under the authority to take place after it has expired, provided the agreement for the allotment was in place before the authority ended.
The old concept of ‘authorised share capital’, which existed up to 1 October 2009 as a clause in the memorandum of association, no longer appears in UK company law.
However, if a company’s constitution has not been updated since then and the clause is still present, it is deemed to be part of the articles of association and its effect is to limit the number of shares that directors can issue. It is therefore good practice to update the constitution and remove this clause.
The next matter that needs to be checked relates to pre-emption rights. The articles may contain provisions and ss560–577 CA2006 should also be consulted.
Pre-emption rights are where any new equity securities to be allotted for cash have to be offered first to existing shareholders in the company, pro rata to their current holdings. This is to prevent their interests in the company being diluted. Such a pre-emptive issue would normally be a rights issue.
The term ‘equity securities’ is defined as ordinary shares or a right to subscribe for, or to convert any securities into, ordinary shares. It also includes the sale of treasury shares, which are ordinary shares. It does not include the allotment of shares under such rights.
The provisions in CA2006 do not apply to subscribers’ shares, capitalisation issues, shares allotted under employees’ share schemes or allotments for a consideration other than cash, wholly or partly, as per ss564–566. Where there are pre-emption provisions in the company’s articles, these should be followed before complying with the provisions in CA2006.
For private companies, it is possible for the articles to exclude the statutory provisions on pre-emption rights. If a private company has only one class of shares then the articles or a special resolution may allow the directors to allot equity securities, disapplying the statutory provisions, or modifying them (s569).
If the directors have been granted a general authority to allot shares, the articles or a special resolution may allow the statutory pre-emption rights to be disapplied. This applies for both private and public companies and may apply to a specific allotment or generally.
“The authority in relation to pre-emption rights lasts until the general allotment authority ends”
Where a special resolution like this is to be proposed, it must be recommended by the directors and an explanatory statement giving their reasons for the recommendation must be circulated. This can be either with the notice of general meeting or with a form of any written resolution of members (s571).
The authority in relation to pre-emption rights lasts until the general allotment authority ends. It can be renewed with the renewal of the general allotment authority. A copy of any resolution granting authority to the directors to allot shares or to disapply pre-emption rights should be sent to Companies House and attached to copies of the articles (ss29–30).
For public listed companies it is wise to follow the pre-emption group guidelines, which set out best practice in relation to the limits on any authority to disapply pre-emption rights.
For main market companies this is typically 5% of the current issued share capital per year or 7.5% on a three-year rolling period. There are circumstances where a further 5% may be authorised. For smaller companies that are growing, it would not be unusual to seek an authority in relation to 10% of their issued share capital every year.
This requires a special resolution and is, again, one typically put to each AGM.
The price paid for the new shares must be at least equal to their nominal or par value – see s580. Any amount paid that is above the nominal value is described as ‘share premium’. The share premium account is a form of capital reserve with restricted use.
Shares may be issued partly paid, but this is not common practice. Consideration will often be in the form of cash but if the consideration is not cash then special rules apply (ss584–587).
For example, if a public company issues shares for non-cash consideration then the consideration has to be valued (ss593–597). This must be done by an independent valuer within the period of six months before the allotment.
A copy of the report must be sent to the proposed allottee and filed at Companies House with the return of allotments form. There will normally be a contract for the transaction, which should be approved by the board.
This contract does not have to be filed at Companies House as it did in the past. The contents of the valuation report are specified in s596.
Allotments that are made as a result of takeover offers on a share-for-share basis are not subject to these valuation provisions, as long as the offer is open to all shareholders. Another exception is for mergers where all of the assets and liabilities of another company are acquired in exchange for shares (ss594–595). The provisions also do not apply to capitalisation issues.
The company should issue a form of application to the person who is to subscribe for shares and this should be completed and returned with payment. Once all the necessary authorities are in place, a board resolution is required to allot the shares and authorise their deposit into CREST or the issue of share certificates.
The new shares should then be issued and the register of members updated with the details of the new shareholder(s). This should be done within two months (s554). The date on the register of members should be the date when the entry was made.
“Once all the necessary authorities are in place, a board resolution is required”
The actual date of allotment for the purposes of CA2006 is when a person has an unconditional right to be entered in the register of members as the holder of the shares (see s558). A form SH01 must be filed at Companies House within one month of the date of allotment.
Under s554, if the company has chosen to have its register of members held by Companies House then particulars of the allotment have to be delivered to the Registrar.
The provisions of listing rule 13.8.1 must be followed in relation to the contents of any circular sent to shareholders when resolutions are proposed to give authority to allot shares or to disapply pre-emption rights.
For listed companies, the share registrars will update the register, issue share certificates and deal with any allotments into CREST.
Forms will need to be completed – and fees paid – for the shares to be admitted to listing and trading. The company’s advisers may submit these on the company’s behalf. There will need to be an announcement about the new issue and once it has occurred, the market advised of the new issued share capital and total voting rights figures.