A share is a slice of ownership in a limited company. Think about your company as a pizza or a cake. Shares represent the slices of that pizza or cake.
If you own 100% of the shares, you own 100% of the company.
Owners of shares in a company are called its shareholders. And the shares they hold give their owners certain rights and entitlements (for example, a right to vote at shareholder meetings and a right to receive a proportion of the profits (these are called dividends).
You can find out more about shares and the different types of share in our guide to shares and your company’s share capital.
A company may allow shares to be issued to its founders and any immediate shareholders contributing financial support when it's first set up; or it may issue shares at any time during its lifetime in order to raise money (called its share capital) from its existing shareholders and/or to introduce new shareholders who want to invest in the business.
The allocation of shares to others is technically called the ‘allotment of shares’ and the decision to give the shares in the first place is called ‘issuing shares' and is made by the directors.
So, a company can decide to issue shares and to allot them to specified investors, who become shareholders.
But ‘issuing’ and ‘allotting’ are terms that are often used interchangeably to mean much the same thing and, for the sake of simplicity, we follow that trend in this guide.
What's the difference between allotting and transferring shares?
An allotment of shares is a transaction that takes place between the company and a new or existing shareholder. The company agrees to issue new shares to the shareholder and, in return, the shareholder pays money to the company.
A transfer of shares is a transaction between an existing shareholder and a buyer who has agreed to purchase those shares. The company is not a party to the transaction and receives no money for the shares. The shares are simply sold by the existing shareholder to the buyer who pays the existing shareholder for them.
There may be limitations placed on a shareholder governing to whom they may be able to transfer shares. For example, they may be obliged to offer their shares to fellow shareholders before they can sell to others. And the company may have imposed approval rights over any proposed third-party buyers, even after that.
What do I need to do to allot new shares in the company?
There’s a fair amount of work and paperwork involved in allotting shares. It’s not simply a case of filling in a form and sending it to the UK’s registrar of companies, Companies House, for them to note on a public record.
Farillio expert Wilkes break it down into 7 key steps for allotting new shares, and we examine them each below.
There’s also a summary of the documents you’ll need to make sure your allotments are valid and enforceable. (You can find all of these docs on Farillio.)
These steps will be applicable to any private company limited by shares that intends to allot new shares. But the guide isn’t suitable for public companies to whom additional requirements apply.
Step 1: Is there a cap on the number of shares you can issue?
To find this out, you’ll need to check your memorandum and articles of association. These are the official documents created right from the outset of setting up and registering your limited company in the UK.
Your memorandum of association is that relatively short document that states (and agrees with any existing shareholders) that the company will be formed for one or more specified purposes.
Your articles of association document is your company’s all-important rule book that governs how you can manage the business and reach decisions.
Both can be changed – so if, when you set up your business, either of them contained a cap or limit on the number of shares that you can issue, and that cap will be exceeded by your proposed allotment of shares, you’ll need either to remove the cap altogether or increase the limit. (We’ll cover where you should look to find this out and how you remove a cap/increase it in a moment).
If you're constrained by one or both of these constitutional documents, the amount of shares that you’re permitted to issue is called your authorised share capital.
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