Share Capital Explained

F4
-
Capitalandthe
Financing
of
Companies
Share
Capital
INTRODUCTION:
Sharecapitalisallthefunds
raisedbya
companyinexchangeforshares.
There are many different classes of shares that a company can sell to raise capital. Not all shares sold will result
in the shareholder having ownership or control in the company. The amount of share capital a company has can
change over time. A company can get authorisation and issue more shares to raise more share capital in the
future.
THE
STATEMENT
OF
CAPITAL
AND
INITIAL
SHAREHOLDINGS:
This document must be provided when registering a company under the UK Companies Act 2006, which shows
thecompany’sshare
capitalatregistration.
Inthestatementof
capitaland
initial
shareholdings,thefollowinginformationmustbegiven:
● The total number of shares of the company to be taken on formation by the subscribers to the
memorandum;
● Theaggregatenominal
value
ofthoseshares.
Foreachclassofshare,thefollowing
informationmustbegiven:
Theprescribedparticulars
of
the
rightsattachedtothoseshares:
1) Thetotalnumberofsharesofthatclass;
2) Theaggregatenominal
value
ofshares
ofthatclass;
3) Theamountstobe
paidand
amounts
(ifthereany)unpaidoneachshare.
The statement of capital and initial shareholdings must also have the following information about the
subscribers:
1) Thenumberof
sharesand
theirnominal
valueandclasstakenbythesubscriberonformation;
2) Theamounttobepaid
up
and,ifrelevant,
theamountunpaidoneachshare.
SHARE
CAPITAL:
Authorised share capitalare the shares that have been authorised in the constitutional documents of the
organisation.Itisthe
mostshares
that
a
companycanissue.
Issuedsharecapital
aresharesthat
have
beenissuedorsoldtoshareholders.
Ordinarysharecapital:
● Ordinarysharesgiveshareholders
ownershipofthecompany.
● Ordinaryshareholderscan
voteattheAGM.
● Dividends are paid to ordinary shareholders at the management’s discretion. It is not obligatory to receive a
dividend. Some shareholders prefer that their shares increase in value and can be sold at a profit rather
thanaregulardividend
income.It
dependsontheshareholderprofile.
● Ordinary shareholders are entitled to the residual share of the company’s assets based on their
shareholdingwhen
it
isbeing
wound
up.
● Inthisevent,shareholders
are
thelastto
getpaid,therefore,theytakemorerisk.
● Ordinaryshareholderswill
also
bepaid
theirdividendsafterthepreferenceshareholders.
● Ordinarysharesform
partof
the
equity
of
thecompany.
Preferencesharecapital:
● Preferenceshares
do
notgiveshareholdersownershipofthecompany.
● Preferenceshareholders
cannotvoteatAGMs.
● Preference shareholders are not entitled to the residual value when the company is wound up. Instead, they
willberepaidtheamount
theyinvestedpriortotheordinaryshareholdersreceivingtheirresidual.
● Preference shares are a mixture of equity and loan capital because they don’t have ownership of the
companyandare
likealoan.
● Thepreferencedividend
can
beeither:
a) Fixed;
b) Atthediscretionofthe
directors.
● Theirdividends
are
paidahead
of
ordinaryshareholders’dividends.
● Therearetwotypes
of
preference
shares:
a) Redeemable
preference
shares,whichhaveafixedrepaymentdate(e.g.,abankloan);
b) Irredeemable
preference
shares,whichhavenofixedrepaymentdate(e.g.,ordinarysharecapital).
Cumulativepreference
shares
are
preferenceshareswherethedividendaccumulatesifunpaid.
THE
DIFFERENCES
BETWEEN
ORDINARY
AND
PREFERENCE
SHARES:
OrdinaryShares PreferenceShares
Haveownership Don’thaveownership
CanvoteatAGMs Havenovote
Ifmoreordinaryshares
areissued,
their
controlisdiluted Havenocontrol
Dividendsareatthe
directors’discretion Haveamorepredictableincome
Areentitledtoaportionof
theassets
when
thecompany Onlyreceivetheirinvestmentbackwhen
the
iswoundup companyisbeingwoundup
Haveagreaterrisktothe
investor Havelessriskthanordinaryshares
TREASURY
SHARES:
Aresharesthatacompanyhas,
buthave
notissuedtothepublic.Thecompanymayhavethembecause:
● Theydidn’tsell
all
itsissuedshare
capital;or
● Theymayhave
boughtbacksharesin
abuyback
If shares are bought back by a company, there are less shares. This means the shares left would have more
power and would earn bigger dividends per share. Treasury shares have no voting rights and should be
excluded from share earnings calculations. They can be sold by the company to raise extra capital at a later
stage.Theycanalso
bekeptso
they
can
be
soldtoavoidahostiletakeover.
CHANGING
THE
RIGHTS
OF
A
CLASS:
The rights of each share class are outlined in the statement of capital and initial shareholdings. These rights are
typically:
● Votingrights;
● Rightstodividends;
● Rightstoareturn
of
capitalon
winding
up.
Changing the rights of a share class is known as a variation of class rights. This can be done if the articles of
association have set out class rights and provisions for altering or varying those rights. Share rights may be
alteredinaccordancewith
these
articles.
If the articles of association do not have provisions for varying the rights, the company can vary its share rights
by:
● Obtaining written consent for the variation from the shareholders of at least three quarters in nominal
valueofissued
shares
of
that
class
(thisexcludesanytreasuryshares);
● By the members of that class passing a special resolution, which is a 75% majority at a separate general
meeting;
● Then, a special copy of the resolution called notice of particulars of variation of rights must be delivered
tothecompany’shouse.
Butif no less than 15% of the issued shareholders of that class didn’t consent to the variation, they can apply to
thecourtstohavethatvariation
cancelledwithin21daysofthepassingoftheresolution.
The courts only intervene when there has been a variation that changes the rights themselves not a change that
affectsthingsderived
fromthe
rights,
such
as
valueorpower.
ALLOTMENT
OF
SHARES:
Shares are allotted to somebody under a contract of allotment. They are then listed on the register of members
andbecomesamemberofthe
company.
Directorsaregiventheauthorityto
allotsharesby:
● Thearticlesofassociation;
● Bypassingan
ordinaryresolution.
Theauthoritytheyaregrantedmusthave:
● Anexpirydate
(maximum
5
years);
● Andmuststate
themaximum
numberofsharesthatcanbeallotted.
ISSUING
SHARES
AT
A
DISCOUNT:
The nominal value of a share is set at incorporation and is outlined in the statement of capital and initial
shareholding.
This nominal value is the extent of the shareholders’ liability. The Companies Act states a company cannot issue
its shares for less than their nominal value (S580 CA06). The act also states that shares are only treated as paid
up to the amount of money that has been received (S582 CA06). If shares are sold at a discount, the issue is still
valid
butthefullamountmustbepaid,
plusinterest(S588CA06).
ISSUING
SHARES
AT
A
PREMIUM:
When shares are sold at more than their nominal value, they are sold at a premium. This happens when the
market value of the shares is higher than the nominal value. The Companies Act requires that the premium must
becreditedtothesharepremiumaccount.
Thisaccountcanonlybe
used
for:
● Writingofftheexpensesof
the
issue
ofnewshares;
● Writingoffanycommissions
paidontheissueofnewshares;
● Issuingbonus
shares.
COMMON
TERMS:
Paid
upsharecapital-
Theamountthat
shareholdershavepaidforsharesissued.
Calledupsharecapital-Theunpaidsharecapitalthatshareholdershavecalledfor,buthavenotpaid
for
yet.
Uncalledsharecapital-Thesearesharesthathavenotbeencalledupbyshareholders,sotheyare
unpaid.
A statutory pre-emption rights - Where the existing shareholders are offered new shares proportionately to
their shareholdings. This does not dilute individual shareholders control. This offer is for 21 days and is only for
ordinary shares, which must be fully paid in cash. A statutory pre-emption rights, however, can be rejected. If this
happens,thecompany
mayhavea
rightsissue.
Bonus issue of shares- When a company issues free shares to shareholders, they may do this instead of
increasing or even paying a dividend. The bonus shares are distributed proportionately with the shareholders’
shareholding.
A three-for-two bonus issue means three shares for every two they held before the bonus issue. So, a
shareholder with 1,000 shares receives 1,500 bonus shares. That is 1000 / 2 = 500. They will get 3 shares for
everytwoheld:500
x
3=
1500.
Advantagesofbonus
issues:
● Thecompanycanmakeapaymentwithoutdepletingcashreserves;
● Thecompanyappears
bigger
with
moresharesissued.
Thedisadvantagesof
bonus
issues:
● Thesesharesdo
not
generateany
capitalbecausetheyareissuedforfree;
● Moreshares
meanthat
ifshareholderssellthebonusshares,theircontrolinthecompanyisdiluted;
● Thedividend
pershareisreducedas
profitsarepaidoutovermoresharesthanbefore.
Rights issue of shares is when new shares are offered to current shareholders in same proportion of their
shareholding. This is to raise funds and if everyone accepts their control is not diluted. The company may have a
rights issue when the statutory pre-emption rights have been rejected. Often, shares are given at a discounted
rate to the market value, however, not the nominal value. If shareholders who receive the rights issue don’t want
topurchasemoreshares,they
can
selltheirrightstosharestoanotherparty.

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