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Are you considering raising equity finance for your company?’

One would have considered that the procedure for allotting new shares in a company is a straightforward process. However, when faced with the question of whether it is the directors or shareholders of a company who decide to allot new shares, many people are not certain. In truth, the answer is a combination of both.One would have considered that the procedure for allotting new shares in a company is a straightforward process. However, when faced with the question of whether it is the directors or shareholders of a company who decide to allot new shares, many people are not certain. In truth, the answer is a combination of both.

There is a procedure to follow when a company decides to raise equity finance by the allotment of shares.

The terms allotment and issue are used interchangeably and whilst this is ok when speaking informally, it is important to note that these terms are actually different. Allotment is defined at s558 of the Companies Act 2006 and refers to “when a person acquires the unconditional right to be included in the company's register of members”[1]. The term ‘issue’ has no statutory definition equivalent and is generally held to be the point at which the new shareholder has been included in the company’s register of members. A simple way to remember this is to think of allotment and issue as a two-stage process. The shares are ‘allotted’ to an individual who is then entitled to be entered into the company’s register of members. Shares are ‘issued’ when the individual is actually noted in the company’s register of members.

In this note, we are focusing on the procedure for allotment in a limited company on the assumption that no prospectus is required.

When the decision is made that the company wishes to allot further shares, the first step is to check the company’s constitution and see whether the company was incorporated under the Companies Act 1985 or the Companies Act 2006. This will determine which steps of the allotment procedure the company must follow.

There are, generally speaking, 5 key steps to follow when allotting shares:

Is there a cap on the number of shares that can be issued?
Do the directors require authority to allot the shares?
Is there a requirement to disapply pre-emption rights?
Is a new class of shares required?
Directors allot new shares.

Within each of these steps, there are sub-steps that need careful consideration. By way of example, there are scenarios whereby the directors do not require authority to allot shares under step 2, however depending on the constitution of the company and whether it was incorporated under the 1985 or 2006 Act then the directors may require shareholder approval. This can also lead to one of the very few occasions where a company must file an ordinary resolution at Companies House.

Once the procedures have been correctly followed at the relevant board and general meetings, the directors and shareholders may well think that their job is done. Not so. The company must be alive to the various post meeting matters and filings at Companies House, many of which must be done within a set number of days after the resolutions have been passed.

If you require assistance allotting shares or any other company law matters, please contact our corporate department in Minehead on 10643707777 or Taunton on 01823745777

 

[1] S558 Companies Act 2006

https://www.legislation.gov.uk/ukpga/2006/46/section/558