Issuing shares

Contents
1. Introduction 2. Directors' power to issue shares 3. Statutory pre-emption rights 4. Issue at a premium 5. Maintenance of share capital 6. Financial assistance for purchase of shares 7. Classes of shares

Shares can be issued by the directors provided that they have the authority to do so.

Directors can issue shares in a company only if they are authorised to do so. This authority is given either in the articles of association or by ordinary resolution of the members in a general meeting. The authority conferred must state the number of shares which the directors are authorised to issue and the time period during which the authority is to last.

Even where the directors have the necessary authority to issue shares, they cannot necessarily issue them to whomever they may choose. The law provides that where shares are issued in exchange for cash, the shares must first be offered to the existing members of the company in proportion to the existing shareholdings.

The statutory pre-emption rights can be removed either by an article in the company's articles of association or by a special resolution of the members. There are two ways of disapplying pre-emption rights with a special resolution. The directors may seek a general authority to allot shares free of pre-emption requirements or they can seek a specific authority for a particular purpose. If the directors wish to remove the pre-emption rights by members' special resolution for a specific allotment, they have to send to all members a written statement setting out their reasons for proposing the special resolution, the consideration that the company is to receive and their justification of the amount.

Depending on their market value, shares may be issued for a price greater than their nominal value. The amount paid above the nominal value of shares has to be recorded in a separate account called the share premium account. This money can only be used for very specific purposes such as paying for expenses related to that particular issue of shares.

The rules relating to maintenance of capital are designed to ensure that:

• the money that the company received from, or is promised by the shareholders for, their shares is equivalent to the nominal value and premium payable for the shares; and
• the money received by the company is maintained as capital fund to which the creditors can look as security for their debts.

However, there are exceptional situations where a company is allowed to reduce its share capital. By law, a private company can reduce its share capital with the approval of its members by special instrument called a solvency statement. Both private and public companies can reduce their share capital with the consent of the court.

Alternatively, instead of reducing the share capital directly, a company can do any of the following, the net result of which is to reduce the capital of the company:

• Cancelling further liability on partly-paid shares
• Paying back to members capital that is not needed
• Reducing the value of the company's shares to reflect capital losses
• Redeeming redeemable shares
• Buying back ordinary shares that have been issued

The general rule is that a public company cannot give anyone financial assistance to enable them to purchase shares in the company. However, there are certain exceptions to the rule, most of which relate to the purpose of the financial assistance but are only applicable if the company's net assets are not reduced or the assistance comes from distributable profits.

Private companies are not generally affected by the prohibition on financial assistance but are not permitted to give financial assistance for the purpose of the purchase of shares in a public company which is a holding company of that private company.

Generally, companies are not allowed to buy back their own shares although this is possible under certain circumstances. Procedures also exist for the transfer of shares in the event of death or bankruptcy of a shareholder.

A company may decide to create different classes of shares each conferring different rights upon their bearer. Usually, some shares will be described as ordinary shares and it is possible to have more than one class of ordinary shares, each with different voting rights.

The directors may decide to issue preference shares, entitling their bearers to some kind of preferential right. Such rights might include the ability to first claim of any dividend, or return to capital. The precise nature of such preferential treatment is determined by the directors and laid out in the shares' terms of issue.

Further, the directors can issue redeemable shares which can be redeemed by either the directors or the shareholders. Such shares can only be redeemed by public companies out of distributable profits or using the proceeds of a fresh issue of shares. Redeemable shares may only be issued when the company has other, non-redeemable shares in issue. Private companies can redeem shares out of their own capital, provided they follow the correct procedure.

If shares are redeemed, they are effectively cancelled and the issued share capital is reduced by the value of the shares. The directors can issue redeemable shares if there is an article in the company's articles of association setting out the details of the terms and conditions of issue or by an ordinary resolution.