This is the seventh in our series of short articles in which we try to shed light on some of the more confusing aspects of the Companies Act 2006 (the "Act"). An earlier article in the series examined the Act's provisions on pre-emption rights. In this article we look at the related matter of share allotments by private companies and ask, among other things, what companies formed under the Companies Act 1985 ("existing companies") need to do to take advantage of section 550, and whether an indefinite authority to allot under section 80A of the Companies Act 1985 still has effect.
Areas of confusion
The provisions of the Act dealing with allotments are not inherently difficult to understand, but they do raise a number of issues, particularly in relation to their application to existing companies. This article considers the following questions:
- what does an existing company need to do to take advantage of section 550 (under which directors of a company with only one class of shares can allot shares without prior authorisation from the shareholders)?
- if the directors of an existing company were given an indefinite authority to allot under section 80A of the Companies Act 1985, does that authority continue indefinitely or is it limited to five years (which is the longest period for which a single authorisation can be given under the Companies Act 2006)?
- what does an existing company need to do to free itself from the restrictions of its statement of authorised share capital?
- can a share certificate be signed by a single director in the presence of a witness, or should it be signed in the traditional way, generally by two directors or a director and the secretary?
Private companies with only one class of shares
The Act gives the directors of private companies with only one class of shares the power, subject to any restrictions contained in the articles, to allot shares of that class without first obtaining authorisation from the shareholders (section 550). In order for existing companies to be able to take advantage of this relaxation of the old regime, their shareholders need to resolve, either as a standalone resolution or through an amendment to the articles, to give the directors this power. An ordinary resolution will suffice for these purposes (even if an amendment to the articles is involved), but the resolution must be filed at Companies House. This transitional requirement will not lapse. In other words, an existing company which has not issued shares since October 2009, but decides to do so in, say, 2015, and wants its directors to be able to take advantage of section 550, will need to pass a resolution or amend its articles.
Shareholders of an existing company who do not want the directors to be able to take advantage of section 550 can, technically, achieve their aim simply by doing nothing: unless they resolve to give the directors the power, section 550 will not apply. For the avoidance of any confusion, though, it will normally be sensible to insert an express restriction on the directors' power into the articles.
Does a section 80A authority continue to have effect?
Under section 551, directors of all companies other than private companies with only one class of shares are permitted to allot shares only if the shareholders have authorised them to do so, either through a standalone resolution or through the articles. An authority is valid for a maximum of five years (although it can be renewed).
The relevant transitional provision in the eighth commencement order relating to the Act states that an existing authority under section 80 or section 80A of the Companies Act 1985 continues to have effect "as if given under section 551". It seems clear that a section 80 authority, which was similarly restricted to a maximum period of five years, continues in force until it expires. What, though, is the effect of a section 80A authority which is expressed to last either indefinitely or for a period of more than five years? On one reading, since an authority "given under section 551" can only ever last for five years, it can be argued that the section 80A authority expires after five years. The better reading, in our view, is that the authority continues to have effect as originally intended, so that an authority given for an indefinite period will duly have effect indefinitely (unless the shareholders decide to revoke or vary it).
Hogan Lovells contributed last year to a joint Law Society Company Law Committee and City of London Law Society Company Law Committee paper which was sent to the government as part of its review of the Act. The note raised the section 80A point, taking the view that the authority continues to have effect as intended, and suggested that the government should amend the transitional provision to clarify the position.
Authorised share capital
Whereas companies formed under the Act are not required to have any upper limit on the shares which they can allot, the statement of authorised share capital in the memorandum of existing companies was automatically carried over into their articles on 1 October 2009 and acts as an upper limit until it is removed. The eighth commencement order relating to the Act sets out two ways to remove it:
- the shareholders can pass an ordinary resolution revoking it (note that any such resolution must be filed at Companies House)
- the company can adopt new articles which do not set any limit.
(The order also provides that an amendment to the articles to insert an authority for the directors to allot shares above the limit has effect. However, such an amendment does not automatically revoke the limit, and so clearly this is not a long-term solution for a company which does not want to be subject to any limit.)
Existing companies which want to retain a limit, for example in order to restrict the directors' power to allot under section 550, should normally insert an express limit into their articles. This is not strictly necessary, since, as noted above, the limit will have been carried over automatically on 1 October 2009, but the insertion of express wording serves to minimise the risk of confusion.
Once shares have been allotted, the company will need to issue share certificates. A small point to note here is that there is no reason why the company cannot take advantage of the new rules on the execution of documents when executing a share certificate. It is, in other words, quite acceptable to execute the certificate through the signature of a director in the presence of an attesting witness.
Alternatively, of course, the certificate can be executed by one of the traditional methods:
- through the signatures of two directors
- through the signatures of a director and the secretary
- by the affixing of the company's seal.