Share Capital

Authorised capital

Authorised share capital will no longer exist for companies incorporated from 1 October 2009. Directors will be able to continue to issue shares without limitation, subject only to authority from the members to allot shares. Companies will have to deliver to the Registrar statements of (issued) capital on formation and at various points (mainly where changes are made in the amount of issued capital). In relation to existing companies with authorised but unissued capital covered by authorities to allot, the existing authorised capital will remain under transitional provisions as a restriction applying to the company unless and until removed by appropriate resolution (an ordinary resolution will suffice). Existing authorities to allot will also remain in effect.

Authority to allot

Where a private company has only one class of shares, the directors will be able to exercise any power of the company to allot shares or grant rights to subscribe except to the extent (if any) that they are prohibited from doing so by the company's articles (or, for an existing company, that they are restricted by an existing authority to allot or ceiling on authorised capital). However, where an existing company's articles do not include an authorisation to alter share capital, it will need to amend its articles in order to provide for this before applying the new rules. Shares will not be regarded as being of a different class only by reason of carrying different dividend rights in the 12 months immediately following allotment.

Pre-emption rights

Pre-emption rights will continue to apply to issues of ordinary shares, unless disapplied by the articles or by resolution of the members. The shares to which these rights apply will be called "equity securities" as opposed to the 1985 Act which uses the term "relevant shares". The net effect is however the same. A private company with only one class of shares will be able to pass a resolution disapplying pre-emption rights on a particular issue without complying with some of the requirements affecting other companies (e.g. the need for the directors to make a written statement justifying the disapplication). Other companies will be able to disapply pre-emption rights by way of provisions in the articles or by special resolution, supported by a written directors' statement, as at present.

Directors of public companies and of private companies having more than one class of shares will be able to exercise powers to allot shares only if authorised to do so by the company's articles or a resolution of the company. Those authorities must specify the maximum number of shares which can be allotted under them and specify an expiry date which must be not more than five years (i.e. largely unchanged from the current position).

The requirement to lodge a copy sale contract in support of a return of allotments for non-cash consideration is not reproduced in the Act. However, the Secretary of State will have power to prescribe the information which must be provided in a return of allotments, which could include the same copy documents.

Redenomination in other currencies

A limited company having a share capital will be able to redenominate its share capital, or any class of its share capital, by ordinary resolution. "Redenominate" means converting shares from having a fixed nominal value in one currency to having a fixed nominal value in another currency. Currently, public companies have to cancel shares, with court approval, and reissue shares in a new denomination in order to achieve a redenomination. Private companies may also redenominate in this way or may repurchase their own shares and reissue in a new currency. These procedures are often costly and take time to implement.

In connection with a redenomination, a company will be permitted to reduce its share capital by an amount not exceeding 10% of the nominal value of its allotted share capital immediately after the reduction (without the need for court approval or any other procedure other than a special resolution), e.g. to eliminate fractions of issued capital arising from exchange rate differences.

Any amount of reduction under these provisions must be transferred to a new undistributable reserve, which may only be utilised in paying up shares to be issued as fully-paid bonus shares (and which can be the subject of a reduction of capital under other provisions of the Act in the same way as paid-up share capital).

Share premium account

Companies will no longer be able to use their share premium account to write off preliminary formation expenses or to write off expenses, commission or discount relating to an issue of debentures. They will be able to use share premium arising on a particular issue of shares to write off expenses and commission incurred on that issue only (or to pay up new bonus shares).

Redemption and purchase of own shares

Private companies will not require authority in their articles to issue redeemable shares (but public companies will still need this). The terms and manner of redemption need no longer be specified in the articles but may (if the articles or a resolution so provide) be determined by the directors before the shares are allotted. Terms of redemption will no longer need to provide for payment in full on redemption.

Companies limited by shares, both public and private, will be able to purchase their own shares unless there is any restriction or prohibition in their articles. This reverses the current position. Contracts for off-market purchases will have to be retained by the company for ten years.

Companies will be able to enter into contracts for off-market purchases conditional on member approval.

Contrary to previous proposals, the provisions relating to purchase of own shares out of capital by private companies are retained. This is in spite of the inclusion in the Act of provisions permitting private companies limited by shares to reduce share capital by special resolution supported by a director's solvency statement without court approval. It had been thought that these new provisions would make the redemption out of capital provisions obsolete, but apparently the Department for Business Enterprise and Regulatory Reform (then the Department for Trade and Industry) was persuaded to the contrary. This was because under the capital reduction procedure, it would not be possible for companies to return to shareholders more than the nominal value of the relevant shares. In both cases, the company will need to take into account all contingent and prospective liabilities in establishing its continuing solvency, not only those relevant for section 122 Insolvency Act 1986.

Register of members

Companies will from 1 October 2009 be obliged to provide to parties exercising rights to inspect a register or index of members' details of when the information was last updated. Failure to do so will be a criminal offence.

Registers of members need no longer include details of past members beyond ten years following cessation of membership (previously 20 years). Claims relating to register entries will be limited to ten years instead of the previous 20.

Regulations to be made under the Act will permit the register of members to be maintained in any location, not just at the company's registered office or at the location where it is written up, provided the location is notified to the Registrar. There will no longer be a power for companies to close the register periodically.

Share Warrants and registration

Companies will be able to issue shares in warrant to bearer form without first issuing them in registered form.

Registration of shares issued other than in warrant to bearer form will have to take place within two months (the current rules require only that a certificate is issued within this period, which will remain the case).

Subscribers to the memorandum of a company will be deemed to be registered as members on formation of the company, whether or not their names are actually entered in the register of members.

It will no longer be possible to convert shares into stock. It will be possible to convert stock into fully paid shares without express authority in the articles.

Class rights

Class rights will be capable of variation in accordance with the company's articles or, if the articles do not contain relevant provisions, in accordance with the Act, which broadly reproduces the existing requirements. A special resolution, rather than an extraordinary resolution, will be required to authorise a variation (but the requirements for a special resolution under the 2006 Act - 14 days' notice and 75% of the class in support, or in writing with 75% of the class in support - reflect the existing requirements).

Provisions relating to variation of class rights will be extended to companies without share capital. Members of a company without a share capital representing at least 15% of a class will have a right to object to a variation of rights to which they have not consented and may apply to the Court to confirm or overturn the variation. This tracks the current provision for companies with shares.

Read Wragge & Co's recommendations for action to take.