Guide to Issuing New Shares in a Private Company Limited by Shares

Guide to Issuing New Shares in a Private Company Limited by Shares

Generally speaking, issuing new shares is a simplified process. There are some practical and legal considerations to be taken into account. Understanding and applying those considerations can streamline and simplify the process. In this article, we identify some of the most common and key considerations and explain how to address them.

What type of shares to issue
First, there are different classes of shares such as ordinary shares, alphabet shares, management shares and even preference shares. First, task yourself with what type of shares do I need to issue. Each class of shares can have separate rights attached to it. Hence, by way of issuing different share classes companies can create different rights for different shareholders.
The company’s articles of association should set out what classes of shares the company can issue, and what rights are attached to each class. But the articles can also be amended to create new classes.
How many shares to issue
Work out how many shares you are willing to issue with reference to how much capital you need to raise. Many articles of association set limits to the maximum number of shares that can be issued by the company. This is called the authorized share capital. You must ensure that the number of new shares you want to issue will not exceed the authorized share capital. In order to issue shares more than the authorized share capital, the articles of association can be amended to increase the authorised share capital itself.
Share price and payment terms
Next, you need to decide the share price and payment terms. Depending on the articles of association, the share price can be paid in instalments as well.
Pre-conditions in the articles of association
Once you have decided which type, how many, and the price of shares you want to issue. Read the company’s articles of association for any preconditions that must be satisfied before the company can make a valid and lawful share issue.
Directors’ authority to issue shares
Most articles of association give directors wide powers to issue new shares. However, there are many exceptions to such authority. It is important to carefully review the articles of association to determine if the authority exists in your particular scenario. For example, sometimes issuing a new class of shares, or nil-paid shares (where all of the prices is paid at a later date) requires a specific authority.
If you are unsure as to whether the directors have the authority to issue new shares, it is best to obtain the consent of the shareholders in the form of a shareholders’ resolution. Again, depending on what your articles of association states, shareholders’ resolution on new share issue can be obtained by calling a general meeting, or by sending them the text of the resolution in writing and asking them to sign and return it to the directors.
Pre-emption rights
Do check if the existing shareholders have rights of pre-emption. Pre-emption rights entail that when a company decides to issue new shares, it must offer the shares first to the existing shareholders in proportion to their existing shareholding. The board of directors write to each existing shareholder to notify them of the company’s intention to issue the new shares and gives them details of the share price, type and the exact number of shares that the particular shareholder is entitled to purchase. Shareholders a given a deadline within which to respond. If any shareholder does not respond by the deadline, his portion of the shares can be issued to anybody else – any other existing shareholder, or an outsider.
The company’s offer to subscribe must be accepted in writing, and the payment due for the share price must be paid by the deadline.
Issue and Allotment
Once the company has received shareholders’ acceptance of the offer, or ‘undertaking to subscribe’ and received the due share price, a board meeting should be held at which the directors will officially resolve to allot and issue shares to those shareholders.
Ensure that the entire process is recorded in the minutes of the board’s meeting.
The corporate secretary or one of the directors can be assigned the task of preparing the share certificates, update the shareholders’ register and carry out the requisite filing with the companies registrar.
How long does it take?
Your articles of association (and your shareholders’ agreement, if any) will often set out the minimum notice periods for calling a board meeting, general meeting and invitations to shareholders to subscribe, etc. On average, the process can be wrapped up in three months.
How long does it take?
Your articles of association (and your shareholders’ agreement, if any) will often set out the minimum notice periods for calling a board meeting, general meeting and invitations to shareholders to subscribe, etc. On average, the process can be wrapped up in three months.

Thought Leadership
MARCH, 16 / 2018