Share Capital and Authorised Capital

When people form a company, they decide whether to limit the members’ liability by shares. The memorandum of association (a document required in the company’s formation) must state:

• the amount of share capital the company will have; and
• the division of the share capital into shares of a fixed amount.

On registration of the company at Companies House, members of the company (the ‘shareholders’) must agree to take some, or all, of the shares. The memorandum of association must show the names of the people who have agreed to take shares and the number of shares each will take. These people are the subscribers.

2. What is authorised capital?

A limited company’s authorised share capital is the amount of capital with which it starts its life (but which it can alter subsequently) and which the memorandum of association states. A company’s authorised share capital is not the same as its issued capital.

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3. Can a company alter its authorised share capital?

Unless its articles of association require a special or extraordinary resolution, a company can increase its authorised share capital by passing an ordinary resolution. You must send a copy of the resolution and, notice of the increase in authorised share capital on Form 123, to Companies House within 15 days of passing the resolution. No fee is payable to Companies House.

A company can decrease its authorised share capital by passing an ordinary resolution to cancel shares which nobody has taken or agreed to take. You must send notice of the cancellation, on Form 122, to Companies House within one month. No fee is payable to Companies House.

*For information about resolutions, see our guidance on ‘Resolutions’, (Companies Act 1985 or Companies Act 2006)

4. Public Limited Companies and the ‘authorised minimum’

A public limited company cannot conduct business or exercise borrowing powers unless and until it has obtained a trading certificate from Companies House, confirming that it has the minimum allotted share capital. This is the ‘authorised minimum’. In order to satisfy the requirement and obtain a trading certificate, the company must have either a minimum of £50,000 of allotted share capital denominated in sterling or a minimum of €65,600 of allotted share capital denominated in euros. The company cannot satisfy the requirement by a combination of euro and sterling shares or by shares in any other currency. Further, a share allotted in pursuance of an employees’ share scheme can only be counted towards satisfying the authorised minimum if at least 25% of the nominal value of each share and any premium is paid up. A company re-registering from a private company to a public company does not have to apply for a trading certificate. But in order to re-register, the nominal value of its allotted share capital must be not less than the authorised minimum and each of its allotted shares must be paid up as to at least 25% of its nominal value and the whole of any premium (although certain shares can be disregarded). The company must satisfy the authorised minimum, for the purposes of re-registration, either by means of sterling shares with a total nominal value of at least £50,000 or by means of euro shares with a total nominal value of at least €65,600. It cannot satisfy it by a combination of euro and sterling shares or by shares in any other currency.

If a company applying for a trading certificate or for re-registration is capable of satisfying the authorised minimum either in euro shares or in sterling shares, it must choose in its application which currency to rely on. A company that is re-registering from private to public must comple 5. What is issued capital?

Issued capital is the value of the shares issued to shareholders. This means the nominal value of the shares rather than their actual worth.

A company may increase its issued capital by allotting more shares, but only up to the maximum allowed by its authorised capital (i.e. a company’s issued share capital cannot exceed its authorised share capital); it must make allotments under proper authority (see question 7).

A public company may offer shares to the general public in a prospectus or by listing particulars. For more information on prospectuses and listing particulars, see chapter 3.

A private company may normally only issue shares to its members, to staff and their families, and to debenture holders. However the company may issue shares to anyone it chooses by private arrangement.

May te Form 43(3)

5. What is issued capital?

Issued capital is the value of the shares issued to shareholders. This means the nominal value of the shares rather than their actual worth.

A company may increase its issued capital by allotting more shares, but only up to the maximum allowed by its authorised capital (i.e. a company’s issued share capital cannot exceed its authorised share capital); it must make allotments under proper authority (see question 7).

A public company may offer shares to the general public in a prospectus or by listing particulars. For more information on prospectuses and listing particulars, see chapter 3.

A private company may normally only issue shares to its members, to staff and their families, and to debenture holders. However the company may issue shares to anyone it chooses by private arrangement.

6. Can a company reduce its issued capital?

Yes, under the Companies Act 1985, a company can reduce its issued share capital in the following circumstances-

where a court order confirms a reduction of capital following a special resolution of the company and the registrar registers the order and a court-approved minute detailing the company’s share capital as reduced;

where the company redeems its shares in accordance with a redemption contract;

where the company’s articles allow it to buy its own shares and an ordinary or special resolution (depending on the circumstances) authorises the purchase;

A public company whose shares are listed on a recognised investment exchange can either cancel those shares or (subject to rules about maximum holdings) hold them “in treasury” for resale, or transfer to an employees’ share scheme, at a later date. In all other cases where the company buys back its own shares it must cancel them and the company’s issued share capital reduces. This does not however reduce the company’s authorised share capital.

From 1 October 2008, a private company can reduce its issued capital by special resolution supported by a solvency statement. This is a new process of capital reduction under the Companies Act 2006 and is only applicable to private companies. A company must deliver to Companies House-

A copy of a special resolution authorising the capital reduction

A copy of the solvency statement made in accordance with sections 642(1)(a) and 643 Companies Act 2006

A memorandum of capital

A statement of compliance by the directors

All the company directors must sign the solvency statement. This is a statement confirming that each director has formed the opinion that:

at the date of the statement there are no grounds on which the company could be found to be unable to pay its debts; and

if it is intended to commence a winding-up at any time in the 12 months following the statement, the company will be able to pay its debts within 12 months of the commencement of the winding up; or in any other.

case, the company will be able to pay its debts within the year following the date of the solvency statement.

The company must send or make available at a general meeting (depending on whether the resolution is proposed as a written resolution or at general meeting) a copy of the solvency statement to every eligible member of the company.

A memorandum of capital is a breakdown of the company’s share capital structure following the reduction.

A statement of compliance by the directors is confirmation that the company made a copy of the solvency statement available to each of the eligible members as required and that the solvency statement was not made more than 15 days before the company’s members passed the resolution.

You must send a copy of the solvency statement and resolution, and the memorandum of capital and statement of compliance by the directors, to Companies House. All of the documents should be sent to Companies House within 15 days of the passing of the resolution. Wherever possible, you should send all the forms together. In any event, the reduction of capital will not take effect until Companies House has registered a copy of the solvency statement, resolution and memorandum of capital.

Companies House has not prescribed forms for this process and you will have to produce your own documents. For further information and detail on the content of these documents, please follow the links below to the legislation:

7. Can a company increase its issued capital?

A company may increase its issued share capital by issuing additional shares. Shares are “issued” when a person is registered as a member in the company’s register of members.

‘Allotment’ is the process by which the company enters into a contract with someone to allot shares and that person acquires an unconditional right to be issued with the shares. Directors allot shares on the company’s behalf, but either the company’s articles or a resolution of the company passed at a general meeting, needs to authorise them to do so.

8. What type of resolution does the company have to pass to give authority to allot shares?

Any public or private company with share capital may give authority by ordinary resolution. Subject to an exception for private comp exceed five years and must set a limit on the amount of shares that the directors can allot under it. The company must deliver a copy of a resolution giving, varying, revoking or renewing an authority to allot shares to Companies House within 15 days of passing it.

A private company with share capital may pass an elective resolution, authorising the directors to allot shares for an indefinite period or for a fixed period longer than five years, though such a resolution must still set a limit on the amount of shares which the directors may allot. The company must deliver a copy of any elective resolution to Companies House within 15 days of passing it. A public company cannot pass an elective resolution anies (noted in the following paragraph) authority must be for a fixed period which must not.

9-Must shares be fully paid-up at the time of allotment?

In a private company, shares do not have to be fully paid up at the time of allotment; payment can be deferred. Shares allotted in a public company must be paid-up to at least a quarter of their nominal value and the whole of any premium. However, this does not apply to shares allotted under an employees’ share scheme, that is, a scheme for encouraging share ownership by employees, former employees and their families.

As a general rule, a company may allot bonus shares to members as fully paid-up. A company which has funds available for the purpose may also pay up any amounts unpaid on its shares. See question 14.

A company must not allot shares for an amount less than the nominal value of the shares, that is, at a discount.

10. Must people pay for shares in cash?

Payment for shares can be in a variety of ways including cash, goods, services, property, good will, know-how, or even shares in another company. The latter is often the case when one company takes over another. It also includes cash payments to any person other than the company allotting the shares.

There are greater restrictions on public companies in what they may accept in payment for shares. Non-cash payments must be independently valued before they allot shares (except in the case of bonus issues, mergers or arrangements whereby shares in another company are cancelled or transferred to the company). The company must deliver a copy of the valuation report to Companies House with Form 88(2).

Generally, allotted shares can be paid for;

wholly for cash;

partly for cash and partly for a non-cash payment; or

wholly for a non-cash payment.

11-What happens if a person is unable to or refuses to pay for shares?

A member is liable to ‘pay up’ at least the nominal value of each of his or her shares and any amount owing to the company is a debt, which it can ‘call up’.

If a member refuses to pay all or any call on a share (i.e. where there has been a ‘call up’), the company may use forfeiture proceedings if its articles so permit.

Paragraphs 18-22 of Table A of The Companies (Tables A to F) Regulations 1985 set out a typical forfeiture procedure. If you have not adopted alternative provisions, you must follow these provisions. You must follow the provisions exactly; otherwise the court may declare forfeiture proceedings void.

Directors may sell, re-allot or otherwise dispose of a forfeited share at their discretion. You do not need to notify Companies House of the forfeiture or re-allotment except in the list of members on the company’s next annual return.

If a member cannot pay a call on shares, and if the company and member agree, the member may surrender the shares to the company. The effect is the same as forfeiture, but avoids the formal procedure. The company may only accept surrendered shares if it could have used its power of forfeiture.

A private company may hold forfeited shares indefinitely pending re-allotment. A public company must cancel the forfeited shares, if it does not otherwise dispose of them, within three years. If cancellation(s) reduce a public company’s allotted capital below the authorised minimum, it has to re-register as a private company within the same period.

A company cannot use forfeited shares for voting purposes.

12-Are there different types of shares?

A company may have as many different types of shares as it wishes, all with different conditions attached to them. Generally share types fall into the following categories:

Ordinary: As the name suggests, these are the ordinary shares of the company with no special rights or restrictions. The company may divide them into classes of different value.

Preference: These shares normally carry a right that the company should pay any annual dividends available for distribution on these shares before other classes.

Cumulative preference: These shares carry a right that, if the company cannot pay the dividend in one year, it will carry it forward to successive years.

Redeemable: The company issues these shares with an agreement that it will buy them back at the option of either the company or the shareholder after a certain period, or on a fixed date. A company cannot have only redeemable shares.

13- Can a company purchase its own shares?

If permitted by its articles, a company may pass a special resolution to authorise itself to buy some of its shares But it cannot do so if this would leave only redeemable shares in issue.

The terms of the resolution will depend on whether it is a ‘market purchase’ (that is, a purchase made on a recognised stock exchange) – or an ‘off-market purchase’ (that is, a purchase made otherwise than on a recognised stock exchange or made on a recognised stock exchange but not subject to a marketing arrangement on that exchange).

You may only make an off-market purchase:

in accordance with the terms of a contract authorised in advance of the purchase by a special resolution; or

under the terms of any contingent purchase contract that the company has approved in advance by a special resolution.

Generally, when a company purchases its own shares, it cancels the shares on their return and you must notify the purchase to Companies House on Form 169 within 28 days.

However, a listed public company may hold the shares ‘in treasury’ for resale or transfer to an employees’ shares scheme at a later date, in which case you must notify the purchase to Companies House on Form 169(1B). For more information on holding shares in treasury, see question 8.

14-What are share warrants?

A share warrant is a document which states that the bearer of the warrant is entitled to the shares stated in it. If authorised by its articles, a company may convert any fully paid up shares to ‘share warrants’. These warrants are easily transferable without any need for a transfer document; that is, they can simply pass from hand to hand.

When a company issues share warrants, it must strike out the share holder’s name from its register of members and state the date of issue of the warrant and the number of shares to which it relates. Subject to the articles, the owner of a share warrant can surrender it for cancellation. If so, the holder is entitled to be re-entered into the register of members. Companies usually issue vouchers with the share warrants in order that owners can claim any dividends.

The holder of a share warrant remains a shareholder but whether they are a member of the company depends on the articles of the company. A company which converts all its shares to share warrants must exercise care as it could become a memberless company and thereby cease to exist.

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