FID Trust International

Information on this page is a complex subject. It cannot replace professional advice. It:

  1. explains the basics of share capital;
  2. applies to all companies incorporated in England, Wales or Scotland with a share capital, whether private or public;
  3. tells you what information must be delivered to Companies House; and
  4. covers the regulation of:
    1. authorised share capital, allotment and cancellation of shares;
    2. types of shares, restructuring share capital and share transfer.

You will find the relevant law in the Companies Act 1985 (as amended).

Share capital

When a company is formed, the person or people forming it decide whether its members' liability will be limited by shares. The memorandum of association (one of the documents by which the company is formed) will state:

  1. the amount of share capital the company will have; and
  2. the division of the share capital into shares of a fixed amount.

The members must agree to take some, or all, of the shares when the company is registered. The memorandum of association must show the names of the people who have agreed to take shares and the number of shares each will take. These people are called the subscribers.

Authorised capital

The amount of share capital stated in the memorandum of association is the company's 'authorised' capital.

Maximum and minimum share capital

There is no maximum to any company's authorised share capital and no minimum share capital for private limited companies. However, a public limited company must have an authorised share capital of at least £50,000 (and, if it is trading, issued capital of £50,000).

Alter authorised share capital

A company can increase its authorised share capital by passing an ordinary resolution (unless its articles of association require a special or extraordinary resolution). A copy of the resolution - and notice of the increase on Form 123 - must reach Companies House within 15 days of being passed. No fee is payable to Companies House.

A company can decrease its authorised share capital by passing an ordinary resolution to cancel shares which have not been taken or agreed to be taken by any person. Notice of the cancellation, on Form 122, must reach Companies House within one month. No fee is payable to Companies House.

For information about resolutions see Resolutions.

Issued capital

Issued capital is the value of the shares issued to shareholders. This means the nominal value of the shares rather than their actual worth. The amount of issued capital cannot exceed the amount of the authorised capital.

A company need not issue all its capital at once, but a public limited company must have at least £50,000 of allotted share capital. Of this, 25% of the nominal value of each share and any premium must be paid up before it can can get a trading certificate allowing it to commence business and borrow.

Getting a "Certificate to commence business and borrow":

To obtain a trading certificate, a new company incorporated as a plc, must deliver a statutory declaration on Form 117 confirming that its share capital is at least the statutory minimum. The Registrar will then issue a certificate entitling it to do business and borrow.

A company may increase its issued capital by allotting more shares but only up to the maximum allowed by its authorised capital. Allotments must only be done under proper authority.

  1. A public company may offer shares to the general public. Share offers to the public are made in a prospectus or are accompanied by listing particulars.
  2. A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses.

Reduce issued capital

A company cannot normally reduce its issued capital as this is the personal property of the shareholders, not of the company. However, the following exceptions apply:

  1. if a court order confirms a "minute of reduction" following a special resolution of the company;
  2. if shares are redeemed (bought back) in accordance with a redemption contract;
  3. if the company's articles allow it to buy its own shares and this purchase is authorised by a special resolution. A public company whose shares are listed on a recognised investment exchange can either cancel those shares or hold them "in treasury" for resale or transfer to an employees" shares scheme at a later date. In all other cases the shares are regarded as cancelled when the company buys them back, although this does not reduce the company's authorised share capital.

For more information about shares, share transfers, and redemption and purchase of own shares.

Allotment of shares

"Allotment" is the process by which people become members of a company. Subscribers to a company's memorandum agree to take shares on incorporation and the shares are regarded as 'allotted' on incorporation.

Later, more people may be admitted as members of the company and are allotted shares. However, the directors must not allot shares without the authority of the existing shareholders. The authority will either be stated in the company's articles of association or given to the directors by resolution passed at a general meeting of the company.

Resolution to allot shares

Any public or private company with share capital may give authority by ordinary resolution. The authority must be for a fixed period of up to five years. Any ordinary resolution giving, varying, revoking or renewing an authority to allot shares must be delivered to Companies House within 15 days of being passed.

A private company with share capital may pass an "elective resolution", to give authority for any fixed period, which may be longer than five years or for an indefinite period. An elective resolution must also be delivered to Companies House within 15 days of being passed.

Notification of Companies House of shares which made to the public

Don't need to be. With effect from 1 July 2005, prospectuses and listing particulars are no longer required to be registered at Companies House. However, the general rule is that a person may not make an offer of securities to the public in the UK, or seek admission to trading on a regulated market in the UK, unless a prospectus approved by the Management Services Authority has been published.

For more information on these requirements, please contact the Management Services Authority (www.fsa.gov.uk or telephone 020 7066 1000).

Notification of Companies House when an allotment of shares has been made

Required. Within one month of the allotment of shares, a return on Form 88(2) must be delivered to Companies House. No fee is payable to Companies House.

A return of allotments must reach Companies House within one month of the first date of allotment. If shares are allotted over a period of time, particularly in a rights issue, it is not acceptable to delay delivery until all the shares have been allotted if this means the form will be late. Instead, you should complete consecutive forms and deliver them within one month of the first allotment stated on each form.

Note: in the case of a rights issue, the date(s) of allotment will usually be the date(s) on which the shares are allotted following receipt by the company of acceptances/renunciations NOT the date on which provisional allotment letters are issued.

If the shares are to be paid for in cash, you must enter details of the actual amount paid (or due to be paid) on the form. Do not include any amount that is not yet due for payment on a partly paid-up share. The amount will reflect the nominal value of the shares and any premium.

Nominal value and share premium:

A company's authorised share capital is divided into shares of a nominal value. The real value of the shares may change over time, reflecting what the company is worth, but their nominal value remains the same. When the company sells shares for more than their nominal value, the actual sum paid will be in two parts - the nominal value and a share premium. The share premium must be recorded separately in the company's financial records in a 'share premium account'.

If the shares are to be allotted for a non-cash payment, the amount entered on the form against "Amount (if any) paid or due on each" must be "nil" or "0.00".

Shares at the time of allotment

Payment may be deferred until later. However, shares allotted in a public company must be paid-up to at least a quarter of their nominal value and the whole of any premium (except that this does not apply to shares allotted under an employees' share scheme, that is, a scheme for encouraging share ownership by employees, former employees and their families).

As a general rule, a company may allot bonus shares to members as fully paid-up. A company which has funds available for the purpose may also pay up any amounts unpaid on its shares.

A company's shares must not be allotted at a discount (that is, for an amount less than the nominal value of the shares).

Payment for shares in cash

Payment can be in goods, services, property, good will, know-how, or even shares in another company. The latter is often used when one company takes over another. It also includes cash payments to any person other than the company allotting the shares.

Public companies are more restricted in what they may accept in payment for shares and non-cash payments must be valued before shares are allotted (except in the case of bonus issues, mergers or arrangements whereby shares in another company are cancelled or transferred to the company). A copy of the valuation report must be delivered to Companies House with Form 88(2).

Generally shares may be allotted for payment:

  1. wholly for cash;
  2. partly for cash and partly for a non-cash payment; or
  3. wholly for a non-cash payment.

Paid up in cash:

A share is paid up in cash if the amount due is received by the company (in cash or by cheque, or the company has been released from a liquidated liability) or an undertaking has been given to pay cash to the company at a future date. "Cash" includes foreign currency.

Information if allotments

Form 88(2) must show the extent to which the shares are to be treated as paid-up. This must be stated as a percentage of the total amount payable in respect of the nominal value and any premium.

Calculating the extent to which shares are paid-up:

If an allotment is partly for cash and partly for a non-cash payment, then the extent to which the shares are treated as paid-up must include the cash and non-cash elements. For example, a £1 share allotted for 50p in cash ( either paid or due and payable ) and 50p in services is still 100% paid-up. If the shares were allotted at a premium, the percentage includes the nominal value of each share and the premium.

Form 88(2) must also include a brief description of the non-cash payment for which the shares were allotted (for example, 'in return for the transfer of 100 ordinary shares of £1 in XYZ limited' or "capitalisation of reserves"). It must be accompanied by the written contract under which title of the shares is constituted.

If there is no written contract, a Form 88(3) must be delivered to Companies House with Form 88(2) within one month of the allotment. No fee is payable to Companies House. Form 88(3) is not acceptable when there is a written contract.

Stamp duty:

Acquiring shares for a non-cash payment involves the transfer of property, which may amount to a chargeable transaction under the Stamp Acts.

Please note: For contracts entered into after 30 November 2003, there is no need to have the written contract or Form 88(3) stamped by the Inland Revenue.

Bonus shares

If authorised by its articles, a company may resolve to use any undistributed profits, or any sum credited to the company's "share premium account" or "capital redemption reserve" to finance an issue of wholly or partly paid up 'bonus' shares to the members in proportion to their existing holdings. The shareholders to whom the shares are issued pay nothing. Since the issue may reduce the amount of money available for paying dividends, the term 'bonus' is not always appropriate. The correct term is 'capitalisation of reserves' or "capitalisation of profits" but the terms 'scrip -' or ' scrip - issue' are also used to describe such shares.

A company can also use a capitalisation of profits to credit partly paid shares with further amounts to make them paid up.

The allotment of bonus shares must be notified to Companies House on Form 88(2). The amount paid or due on each share is "nil"or "0.00" and the shares are shown as paid up "otherwise than in cash".

In addition, if a listed public company issues bonus shares in respect of shares held in treasury, the company must notify Companies House on Form 169(1B). Stamp duty is not payable. No fee is payable to Companies House.

Pre-emption rights

These are the rights of existing members to be offered new shares by the company. 'Pre-emption' rights give members the opportunity to accept or reject a share offer before the company offers new shares elsewhere.

Note: pre-emption rights do not apply to allotments of shares that are issued as wholly or partly paid-up for a non-cash payment or shares in an employees' share scheme. (An employees' share scheme means a scheme for encouraging share ownership by employees, former employees and their families.)

The memorandum or articles of a private company may exclude pre-emption rights; however, a public company's cannot.

The Companies Act 1985 allows a company to pass a special resolution not to apply pre-emption rights. This is known as the 'disapplication of pre-emption rights'. The resolution will apply to one specific allotment; a further resolution is needed if similar conditions were to apply to further allotments. A copy of the special resolution must be delivered to Companies House within 15 days of being passed. No fee is payable to Companies House.

Refusing to pay for shares

A member is liable to pay up the nominal value of each of his shares and the amount owing to the company is a debt which can be 'called up'.

If a member refuses to pay all or any call on a share, the company may use forfeiture proceedings if permitted by its articles. A typical procedure is set out in paragraphs 18-22 of Table A of The Companies (Tables A to F) Regulations 1985 (if alternative provisions have not been adopted). As these proceedings are of a penal nature the regulations must be followed exactly, otherwise the court may declare forfeiture proceedings void.

A forfeited share may be sold, re-allotted or otherwise disposed of at the discretion of the directors. Companies House need not be notified of the forfeiture or re-allotment except in the list of members on the company's next annual return.

If a member cannot pay a call on shares, and if the member and the company agree, the shares may be surrendered to the company. This has the same effect as forfeiture but avoids the formal procedure. The company may only accept surrender if it could have used its power of forfeiture.

A private company may hold forfeited shares indefinitely pending re-allotment. A public company must cancel the forfeited shares if they are not otherwise disposed of after three years. If the cancellation were to reduce a public company's allotted capital below the statutory minimum, it would have to re-register as a private company.

A company cannot use forfeited shares for the purposes of voting.

Paid-up capital, uncalled capital, reserve capital and share premium

These terms are used to describe the make-up of a company's share capital:

  1. paid-up capital is the issued capital which has been fully or partly paid-up by the shareholders;
  2. uncalled capital is that part of the issued capital on which the company has not requested payment;
  3. reserve capital is that part of the share capital that the company has decided will only be called up if the company is being wound up and for the purposes of it being wound up;
  4. share premium is the excess paid above a share's nominal value. This excess must be recorded separately in the company"s financial records in a 'share premium account' and used for the purposes specified in Section 130 of the Companies Act 1985 (for example, in paying up unissued shares to be allotted to members as fully paid-up bonus shares.)

As an example, if a company issues 1,000 shares with a nominal value of £1 each, paid-up to 20% of their nominal value with a 10% reserve and a share premium of 50p, the capital is:

paid-up capital = £200 (1,000 x £0.20)
reserve capital = £100 (1,000 x £0.10)
uncalled capital = £700 (1,000 x £0.70)
share premium = £500 (1,000 x £0.50)