Issuing or transferring shares

Issuing shares

Shares carry legal rights associated with a person’s or entity’s ownership of such company. Such rights may include:

  • the right to vote;
  • the right to receive a dividend and other distributions; and
  • the right to capital on a winding up of the company.

From a company’s perspective, issuing shares is a method of generating finance for the purposes of growing its business as well as onboarding key personnel who can contribute their expertise to benefit the company.

There are a number of steps to consider for issuing shares in a private limited company, which are set out below:

Check whether the company is permitted to issue new shares

Companies incorporated under the Companies Act 1985 were required to state in their memorandum of association a limit to the number of shares that can be issued, otherwise known as the “Authorised Share Capital” (ASC). This no longer applies to companies incorporated under the Companies Act 2006, however such companies may nevertheless decide to implement an ASC in their articles of association.

A company can vary or remove their ASC by amending its existing articles of association, or by adopting a new set of articles of association that excludes an ASC. Either method will require the passing of a special resolution.

Is Shareholder Authority needed to issue new shares?

Under the Companies Act 1985 and Companies Act 2006, it is necessary for the directors of a company to have the authority to allot new shares. For example:

  • For companies with only one class of shares, the directors can rely on the authority provided under section 550 of the Companies Ac 2006.
  • Where a company has more than one class of shares, the directors will need express authority to allot from the company’s shareholders. This can be achieved by way of an ordinary resolution passed at a general meeting or using the written resolution procedure under the Companies Act 2006.
  • For companies incorporated under the Companies Act 1985 or before, an ordinary resolution giving directors the authority to allot must be passed.

However, it is also important to check if prior authority has already been granted to the directors, for example, in the company’s articles of association.

Disapplication of Pre-emption Rights (Statutory or constitutional)

Pre-emption rights are held by the existing shareholders of a company, as a means to prevent “dilution” of their shares on the issue of new shares. Such rights require the new shares to be first offered to the existing shareholders – in other words, the existing shareholders have a right of first refusal.

Statutory pre-emption rights are available, however a company’s articles of association may modify them, or even dis-apply them in favour of bespoke provisions.

If the directors wish to dis-apply or waive these rights,  they should consider the following options:

  • review the company’s articles of association to determine what approvals (if any) are needed to remove the application of pre-emption rights and obtain such approvals;
  • propose that a special resolution is passed to dis-apply the statutory pre-emption rights (if they apply);
  • obtain waivers of pre-emption from the existing shareholders.
  • exclude or caveat the application of any pre-emption rights in the company’s articles of association;

Our Corporate and Commercial lawyers can advise and assist with the issue of new shares and draft the relevant legal paperwork, including amendments to articles of association and/or formal company resolutions.

Transferring shares

A company may wish to place restrictions on the transfer of its existing shares, for example, to avoid the risk of unfamiliar third parties or competitors from becoming shareholders and participating in key decision-making.

The authority to transfer shares is typically derived from the company’s articles of association and, if applicable, a shareholders’ agreement relating to such company.

If a company’s articles of association are silent on the subject of transferring shares, then the default position is that the shares are freely transferable at any time. However, any relevant shareholders’ agreement should also be checked for additional transfer provisions.

Restrictions on transferring shares

A company can set out pre-transfer requirements in its articles of association or any shareholders’ agreement that must be satisfied before shares can be transferred.

Typical restrictions include pre-emption rights on a transfer of shares, either in a company’s articles of association or shareholders’ agreement. Similar to the pre-emption rights for an issue of new shares (as mentioned above), these rights allow existing shareholders the right to buy or refuse the shares before they are offered to a third-party purchaser.

Other, more complex, restrictions may be included in the articles of association and/or relevant shareholders’ agreements.

How we can help

Our lawyers in the Corporate and Commercial Department can review  and advise on the relevant transfer provisions, including options to dis-apply or modify them where necessary. We also advise on and draft articles of association and/or shareholder agreements and any requirements or concerns relating to the issue of new shares.

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