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#16639 - Allotment Of Shares - Business Law and Practice

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ALLOTMENT OF SHARES

  • If a company wishes to allot new shares, ask the two questions below. The answers determine what steps must be taken before the directors can allot the shares.

  • Always check the company’s articles of association to see if pre-emption rights are disapplied

  1. Do the directors need, and, if so, do they already have authority to allot new shares? (sections 549 to 555 CA 2006)

  • MA 3 – Directors’ general authority

  • S.549 – Exercise by directors of power to allot shares

  1. The directors of a company must not exercise any power of the company—

  1. to allot shares in the company, or

  2. to grant rights to subscribe for, or to convert any security into, shares in the company,

except in accordance with section 550 (private company with single class of shares) or section 551 (authorisation by company).

If the company only has one class of shares:

S.550 – Power of directors to allot sharesetc: private company with only one class of shares

Where a private company has only one class of shares, the directors may exercise any power of the company—

  1. to allot shares of that class, or

  2. to grant rights to subscribe for or to convert any security into such shares,

except to the extent that they are prohibited from doing so by the company's articles.

If the company has more than one classes of shares:

S.551 – Power of directors to allot sharesetc: authorisation by company

  1. The directors may allot shares if they have the power to do so by the company’s articles or by resolution of the company.

  1. Authorisation must —

  1. State the maximum amount of shares that may be allotted under it, and

  2. Specify the date on which it will expire which must not be more than five years from either

    1. the time of the original incorporation of the company if the authorisation is contained in the company’s articles, or

    2. in any other case, the date on which the resolution is passed.

  1. If new shares are issued, does any person have any right of pre-emption in relation to the new shares? (sections 560 to 572 CA 2006)

  • S.560 - Equity securities = ordinary shares in the company

  • S.561 – Existing shareholders' right of pre-emption

  1. A company must not allot equity securities to a person on any terms unless—

  1. it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company, and

  2. the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made.

  • S.562 – Communication of pre-emption rights

  1. The offer must state a period during which it may be accepted and the offer shall not be withdrawn before the end of that period.

  2. The period must be a period of at least 14 days beginning—

  1. in the case of an offer made in hard copy form, with the date on which the offer is sent or supplied;

  2. in the case of an offer made in electronic form, with the date on which the offer is sent;

  3. in the case of an offer made by publication in the Gazette, with the date of publication

  • S.565 – Exception to pre-emption right: issue for non-cash consideration
    Section 561(1) (existing shareholders' right of pre-emption) does not apply to a particular allotment of equity securities if these are, or are to be, wholly or partly paid up otherwise than in cash.
Disapplication of Pre-Emption Rights

If the company only has one class of shares:

S.569 – Disapplication of pre-emptions rights: private company with only one class of shares

If the company has more than one class of shares:

S.570 – Disapplication of pre-emption rights: directors acting under general authorisation
If s.561 pre-emption rights have not already been disapplied in the company’s articles under either s.569 or s.570, a special resolution is needed to disapply those rights.

S.571 – Disapplication of pre-emption rights by special resolution

  1. Where the directors of a company are authorised for the purposes of section 551 (power of directors to allot sharesetc: authorisation by company), whether generally or otherwise, the company may by special resolution resolve that section 561 (existing shareholders' right of pre-emption)—

  1. does not apply to a specified allotment of equity securities to be made pursuant to that authorisation, or

  2. applies to such an allotment with such modifications as may be specified in the resolution.

  1. A special resolution under this section … must not be proposed unless—

  1. it is recommended by the directors, and

  2. the...
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