Equity finance 1

Shares

Units of ownership in a company giving shareholders a bundle of rights.

Share Capital

Money raised by a company by issuing shares.

Capital

Money available to run a company.

Equity Finance

Funding by issuing shares to investors.

Debt Finance

Funding by borrowing money.

Retained Profits

Funding by reinvesting profits instead of paying dividends.

Shares as a “bundle of rights”

Shares usually give voting rights, dividend rights (if declared), and rights to surplus assets on winding up.

Shareholder incentives

Dividends (income) + capital gain (increase in share value).

Private company shares

Generally long-term investments with limited exit routes; check Articles for rights/restrictions.

Classes of shares

Different categories of shares carrying different rights; determined by the Articles.

Nominal/Par Value (s 542 CA 2006)

Every share must have a fixed nominal value (e.g., 1p/£1).

Issue at a discount (s 580)

A company cannot issue shares for less than nominal value.

Share Premium

Amount paid above nominal value when shares issued at a premium.

Issued Share Capital (ISC)

Total shares currently issued by the company (subscriber shares + later issues).

Subscriber shares

Shares taken by subscribers on incorporation.

Allotment (s 558)

When an investor gets an unconditional right to be registered as shareholder (company agrees to issue shares).

Issue of shares

When the shareholder is entered into the register of members (legal title completes).

Register of members (s 112(2))

The statutory register showing legal shareholders; legal title passes on registration.

Paid-up capital

Amount actually paid by shareholders for their shares.

Called-up capital (s 547)

Paid-up amount + any amount demanded but not yet paid.

Treasury shares

Shares bought back by the company and held in treasury; can be re-sold, cancelled, or used in employee schemes.

Treasury share re-sale

Treated as a transfer (not an issue) but statutory pre-emption is treated as applying to treasury disposals (s 560(3), s 561).

Ordinary shares

Default share class; usually voting + dividend rights + surplus on winding up; “ordinary” in s 560(1) defined negatively (not capped in both dividends and capital).

Ordinary shares dividend position

Dividends generally unrestricted but ordinary ranks after preference shares.

Preference shares

Priority over ordinary for dividends and return of capital; dividend often fixed % of nominal value; usually non-voting unless Articles say otherwise.

Cumulative preference shares

Presumed cumulative unless Articles say otherwise; unpaid dividends roll forward and are paid when profits allow.

Participating preference shares

Right to fixed dividend plus participation in surplus profits/assets alongside ordinary shareholders.

Deferred shares

Usually no voting rights and little/no dividend; sometimes entitled to surplus but often effectively worthless; used in restructurings.

Redeemable shares

Issued on terms that company will/may repurchase and cancel later; common in incentives/investment structures.

Convertible shares

Shares convertible into another class later (e.g., preference to ordinary) per Articles/terms.

Variation of class rights

Changing rights attached to a share class; procedure in Articles or statutory default.

Default variation rule (s 630)

If Articles silent, need consent of ≥75% of that class (written or special resolution in separate class meeting).

Minority protection (s 633)

Holders of ≥15% of class who did not consent can apply to court within 21 days to cancel variation.

Court approach to variation

Court will not confirm if variation causes unfair prejudice.

Dividend

Shareholder return paid only if declared and only from distributable profits.

Distributable profits (s 830)

Accumulated realised profits minus accumulated realised losses.

Final dividend

Recommended by directors and declared by shareholders by ordinary resolution.

Interim dividend

Declared by directors (if Articles allow, e.g., MA 30); no shareholder approval needed.

Allotment vs Transfer vs Transmission

Allotment creates new shares; transfer sells existing shares; transmission happens automatically by law (death/bankruptcy).

Allotment

Contract between company and investor to issue new shares for subscription price; creates new share capital.

Transfer

Contract between existing shareholder and buyer/donee for existing shares; company not a party except treasury re-sales.

Transmission

Automatic vesting of shares by operation of law (death → personal representatives; bankruptcy → trustee).

Private company offer to public ban (s 755)

Private company limited by shares cannot offer its shares to the public.

“Offer to the public” (s 756)

Includes offers to any section of the public; excludes offers intended only for the recipient and “private concern” offers (members/employees/family; employee share schemes).

Prospectus requirement

If offering transferable securities to the public, a prospectus may be required under FSMA regime (s 87A FSMA sets content standard).

Private company fundraising and prospectus

Usually no prospectus for targeted private raises, but exemptions must be checked each time.

Financial promotion restriction (s 21 FSMA)

Invitation/inducement to engage in investment activity is prohibited unless an exemption applies or approved by FCA-authorised person.

Private placing FSMA practice point

Use exempt communications (high net worth, sophisticated investor, one-off) or obtain authorised approval.

Director duties on allotment

Must be for proper purpose (s 171) and align with company success (s 172) plus s 173

Transferability of shares (s 544(1))

Shares are transferable subject to the Articles; always check Articles and any shareholders’ agreement.

Director discretion to refuse registration (MA 26(5))

Board may refuse to register a transfer; must return instrument with notice unless fraud suspected.

Reasons for refusal (s 771)

Company must give reasons if refusing to register a transfer.

Pre-emption on transfer

Not automatic in CA/MA; exists only if inserted in Articles/shareholders’ agreement; gives existing members first refusal.

Statutory pre-emption on allotment

Applies to new issues of equity securities (s 561+) not to ordinary transfers.

Instrument of transfer (s 770)

Stock transfer form signed by transferor (usually lodged with share certificate).

Stamp duty on share transfers

0.5% of consideration rounded up to nearest £5; no duty if ≤£1,000; if >£1,000, £5 minimum; paid by buyer.

Equitable title on transfer

Beneficial/equitable title passes on execution/delivery of stock transfer form (and consideration).

Legal title on transfer

Passes on registration of transferee in register of members (s 112).

Share certificate timing (s 776)

Company must issue new share certificate within 2 months of transfer registration.

Effect of board refusal

Buyer holds equitable interest pending board approval/registration if Articles allow refusal.

Transmission on death

Shares vest in personal representatives; they can register or transfer to beneficiaries; company may require probate evidence.

Transmission on bankruptcy

Shares vest automatically in trustee in bankruptcy; trustee may register or sell.

Transmission key difference

Happens by law not contract; company must register on proper evidence subject to Articles.

Treasury shares and pre-emption

Treasury disposal treated like allotment for statutory pre-emption (s 560(3), s 561) and can be disapplied (s 573).

Allotment checklist

Check Articles and authority to allot (s 550/551), deal with pre-emption (s 561

Transfer checklist

Check Articles/SHA restrictions, run transfer pre-emption (if any), execute stock transfer + certificate, stamp duty, board approval (if needed), register update (s 112), issue new certificate within 2 months.

Common allotment pitfall

Issuing shares for improper purpose (s 171) may be challenged.

Common confusion pitfall

Mixing up pre-emption on transfer (Articles/SHA only) with statutory pre-emption on allotment (s 561).

Refusal to register pitfall

Must follow Articles strictly and give reasons (s 771) to avoid unfair prejudice risks.

Stamp duty practical point

Companies typically require evidence of stamping/payment before registering transfer.

Transmission pitfall

Do not insist on transfer formalities where transmission applies; request probate/bankruptcy documentation instead.

Allotment Step 1 (Cap/headroom)

Check Articles for cap; CA 2006 has no automatic authorised share capital unless inserted; CA 1985 deemed cap may exist.

CA 2006 cap in Articles

Can exist only if inserted; amend/remove by special resolution (s 21).

CA 1985 deemed authorised share capital

Became a deemed cap in Articles from 1 Oct 2009; can be removed/amended by ordinary resolution or by adopting new Articles.

Headroom practical checks

Review latest Articles, register of members, confirmation statement, and SH01 filings to see current issued capital and capacity.

Share capital increases automatically (s 617(2)(a))

Issued capital rises automatically on each issue.

Allotment Step 2 (Authority)

Directors cannot allot unless authorised (s 549) via s 550 or s 551.

s 550 authority

Private company with only one class in issue has automatic authority to allot shares of that class unless Articles restrict (CA 1985 companies may require OR to rely).

s 551 authority

Authority for allotment via Articles or ordinary resolution; must be limited in amount and time (s 551(3)).

Practice on s 551

Often renewed annually (commonly linked to AGM).

Allotment Step 3 (Statutory pre-emption)

Existing holders of equity securities have first refusal on new issues (s 561

Equity securities definition (s 560)

Ordinary shares or rights to subscribe/convert into ordinary shares; “ordinary” here means shares not capped in both dividends and capital.

When statutory pre-emption applies

Applies when issuing equity securities (uncapped ordinary shares or conversion/subscription rights).

When statutory pre-emption does not apply

Does not apply if shares are capped in both dividends and capital (not “equity securities”).

Comply with pre-emption (s 562)

Offer shares pro-rata to existing holders with a reasonable acceptance period.

Disapply pre-emption (s 570)

General disapplication attached to s 551 authority by special resolution or via Articles.

Disapply pre-emption for s 550 company (s 569)

Private company with one class relying on s 550 disapplies by special resolution (or by Articles).

Specific disapplication (s 571)

Special resolution for a named allotment plus directors’ written statement (s 571(6)) justifying reasons and amount.

Permanent exclusion in Articles (s 567)

Private company can exclude statutory pre-emption in Articles; rare outside groups/subsidiaries.

Allotment Step 4 (New class)

If creating a new class, insert class rights into Articles (special resolution s 21) before allotment.

Allotment Step 5 (Board resolution)

Board must resolve to allot shares; record authority, pre-emption compliance/disapplication, proper purpose (s 171), s 172 considerations, class rights, and allotment terms.

Post-allotment filing: resolutions

File resolutions within 15 days and file amended Articles where changed.

Return of allotment (s 555)

File SH01 and statement of capital within 1 month of allotment.

PSC filings

If allotment changes PSC position, file PSC forms within prescribed periods and update internal PSC register.

Register of members update

Enter new shareholder and allotment details; certificates and register updates typically within 2 months.

Share certificate on allotment (s 769)

Issue share certificates within 2 months of allotment.

Timing overview allotment

Authorities/disapplications in place, then board allots, then file resolutions (15 days), SH01 (1 month), update registers/certificates (2 months), update PSC if needed.

Allotment key mistake

Allotting without valid authority (s 550/s 551 expired or insufficient).

Allotment key mistake

Ignoring statutory pre-emption where engaged; must comply or disapply before issuing to outsiders.

Allotment key mistake

Creating new class without amending Articles first (s 21 SR needed).