CFM11020 - Understanding corporate finance: raising finance: issuing shares

Issuing shares

In order to a company formed under the Companies Acts to issue share capital, the directors must have the power to allot shares. For a private company with only one class of share capital, the power to allot may be granted by shareholder resolution under s550 Companies Act 2006 and this power is unlimited in time or by the amount of shares. Otherwise companies may grant the directors a power to allot under s551 Companies Act 2006 subject to a maximum validity of five years and a maximum amount of shares as stated in the shareholder resolution. Older companies may also have retained a limit on authorised share capital, although the requirement for such a limit was repealed on 1 October 2009.

Generally, prior to 1 December 2003, it was against the law for a company to buy its own shares so it was not possible to redeem ordinary shares. It is now possible for a company to buy its own shares back from the shareholders.

If a company wishes to reduce its issued share capital it needs permission from the courts or, for private companies, a reduction of issued share capital may be effected pursuant to the solvency statement procedure under the Companies Act 2006.

There are many different kinds of shares which may be issued and the rights which apply to such shares will be set out under the articles of association of the company. These may include:

Ordinary shares

Ordinary shares normally carry a right to participate in a company through voting and an entitlement to receive dividends. When a company is wound up the ordinary shareholders will be last in the queue to have the par value of their shares returned to them. It is also possible to issue ordinary shares which carry different rights. Often these shares are differentiated by being classed as ‘A’ shares, ‘B’ shares etc. It may be possible to issue ordinary shares which carry no voting rights but do carry rights to dividends (but there must always be at least one share in issuance with voting rights). This type of share might be found where the original shareholders want to keep control of the company’s affairs but do not want to own more than half the shares.

Refer to CG-APP11 for more guidance on the meaning of ‘ordinary share capital’ for corporation tax purposes.

Preference shares

Preference shares are not included in equity share capital because their rights are different to ordinary shareholders’ rights. Preference shares do not normally give the holder the right to vote and so issuing preference shares will not usually take the control of the company away from the ordinary shareholders. They carry a right to a fixed dividend so the preference shareholder does not benefit proportionately if the company’s profits increase. On the other hand, preference shareholders are entitled to their dividend before the ordinary shareholders get theirs so the preference share holders’ dividend is more likely to be paid if the company is not doing so well. In addition, if the company is wound up, it is common for the preference shareholders to get repaid the par value of their shares before the ordinary shareholders get their money back.

Redeemable preference shares

The terms of issue of redeemable preference shares give the issuer the right to redeem them. This type of share comes nearer to having the qualities of a debt.

Cumulative preference shares

Cumulative preference shares allow the holder to be paid a dividend in a later year if there are insufficient funds to meet the dividend in an earlier year. This means the holder can probably ensure that dividends for all years are paid regardless of the ups and downs of the business.

Other types of preference shares

Preference shares can be structured to meet a variety of needs and may be a flexible instrument; hence they are often used by institutional investors such as Venture Capital Funds and include Cumulative Redeemable Participating Preference Shares.