Step by step: allotting and issuing new shares in a private company

Raising finance for a private company, be it to assist in expansion or business growth, can be done in a number of ways. The allotment and issue of new shares is a common way of doing so. To ensure a successful issue, there is a legislative framework that operates in tandem with other key considerations for which account must be taken.

Generally, the process for allotment is similar for all private companies. When dealing with companies incorporated under the Companies Act 1985 (the 1985 Act) or its predecessors there are some additional steps to be followed. It is important to remember that all those companies incorporated before 1 October 2009 will be incorporated under the 1985 Act or before.

Incorporation & Constitutional Documents

First it must be verified that there are no restrictions in terms of the company's power to allot shares. This can be ensured by checking the company's constitutional documents – these govern exactly what directors can and cannot do in relation to the company and include its Memorandum (for companies incorporated before 2009), articles of association and any Shareholders' agreement.

Authorised Share Capital (ASC)

This is only relevant to those companies incorporated before 2009. For these companies, the Memorandum states the ASC (unless it has been subsequently removed or amended). The value of the ASC represents the limit on the number of shares that the company can issue.

Authority to allot new shares

It is necessary that the directors have the authority to allot new shares. There are three different scenarios that could arise:

• Section 550 of the Companies Act 2006 (the 2006 Act) sets out the default position that directors of those companies incorporated under the 2006 Act, with only one class of shares have this authority to allot shares, unless of course the articles of association restrict this action.
• Directors of companies with more than one class of shares need to obtain express authority to allot from the company's shareholders. This is done by means of an ordinary resolution passed at a general meeting or using the 2006 Act written resolution procedure.
• For companies incorporated under the 1985 Act or before, an ordinary resolution giving directors the authority to allot must be passed.

The price at which a share is to be issued may be either its nominal value, of say, £1.00 each or at a premium. On the other hand shares cannot be issued at a discount.

Enforceable Pre-Emption Rights (Statutory or Constitutional)

These are rights held by existing shareholders that set out that where any new shares are to be allotted, they must be first be offered to existing shareholders. In other words, existing shareholders have a right of first refusal.

When checked, the articles of association will indicate whether the statutory rights have been excluded, disapplied or indeed are still in place.

If the directors wish to exclude these rights, an express provision to this effect in the articles of association should be included on drafting.

Alternatively, if the directors are looking to disapply or modify these statutory rights, a special resolution should be passed . It is important to remember as part of this process, a copy of the resolution should be filed at Companies House within 15 days.

Registration and filing

Registration of any allotment is essential, without this the new shareholders will not hold the allotted shares, nor be a member of the company.

The registration process unfolds as follows:

• The Register of Members needs to be updated
• It is also important to remember that the company's PSC register might also require updating if the allotment changes the company's PSC position.
• An SH01 and any shareholders' resolutions required for the allotment along with any other related documents should be filed at Companies House.

Share certificates can then be issued to shareholders for their new shares.

Should you require any further information, please get in touch with your usual Brodies contact.