Allotment of Shares and Pre-emption Rights Flashcards
(18 cards)
What is an ‘allotment of shares’?
An issue of new shares in a company
What did the CA 1985 say about the number of shares that can be issued?
The Memorandum of Association, forming part of the AA’s, limit the number of shares that can be issued.
If there is an insufficiently large cap which has not been amended, then shares cannot be issued until that cap is removed or raised via an OR
What does the CA 2006 now say about the number of shares that can be issued
The AA’s can contain a cap on the number of shares that can be issued.
NOTE: By default, there is no limit on authorised share capital in the MAs for private companies limited by shares - but it’s always possible for company to have included a cap in the AA’s
- An SR is needed to remove or raise a cap in AAs.
Do the directors have the authority to allot shares?
Depends
- For priv company with 1 class of shares: directors can allot shares of that class without further approval.
- For company with multiple classes of shares, director must be authorised via:
- OR stating maximum number of shares to be allotted. Authority expires 5 years after OR.
- provision in AA’s. authority expires 5 years after company incorporation.
What happens if a director knowingly allots without appropriate authority?
The allotment would not be invalidated, but director would commit an offence.
What are pre-emption rights?
They are a “right of first refusal” for existing members, offering them chance to buy any new shares issued by company before they are offered to potential investors.
‘Pre emption rights are usually offered in proportion to…’
Give an example of how this works.
…the member’s existing shareholding.
- e.g. if member owned 10% of share capital, they would be offered first refusal on 10% of new shares being allotted.
What are the 2 main ways in which a shareholder can obtain pre-emption rights?
- The company may have a special article giving members these rights, or;
- There may be statutory pre-emption rights.
What are equity security pre-emption rights?
Statutory pre-emption rights which are conferred on members for some transactions involving allotment of ‘equity securities’.
What are ‘equity securities’?
They are defined as:
- ordinary shares in a company: or
- rights to subscribe for, or to convert securities into, ordinary shares in company.
What are ordinary shares?
An ordinary share, or common share, is the most basic type of share, typically representing ownership of company’s capital.
- Ordinary shareholders have voting rights, a right to dividends, and a share in any surplus assets when a company is wound up.
Describe how statutory pre-emption rights may/may not arise based on how the shares are paid for?
If shares are paid entirely by cash: existing shareholders will have statutory pre-emption rights
If shares paid wholly or partly by non-cash consideration: existing shareholders will have no statutory pre-emption rights.
NOTE: AA’s can still provide for them.
How can a company prevent the statutory pre-emption rights from applying?
By:
- Expressly excluding them in AA’s
- impliedly excluding them by including bespoke Article conferring pre-emption rights on members.
- disapplied either by
- special provision in AA’s (which can be permanent)
- a SR disapplying statutory rights for a particular transaction. SR must
- the shareholders waiving rights in a letter of waiver.
What procedure must the company follow if pre-emption rights apply?
- shares must be offered to members with pre-emption rights, in proportion to existing shareholding.
- members should be given 14 days to consider and reply.
- If granted, the allotment must be registered asap, within maximum of 2 months, by updating register of members and offering them share certificates.
If AA’s do not provide any provisions to govern a class of share being issued, what must the company do?
They must pass an SR to amend the AA’s. A copy must then be sent to CH within 15 days.
Even if pre-emption rights are excluded, what might a company still be required to do for members when a new share is issued?
They might have to given them notice of a share issue.
When a company issues a new share issue, what does it need to register with CH?
Company must register return of allotment with CH on form SH01 within 1 month.
- Penalties payable on default.
Allotment itself must be registered asap, within maximum of 2 months, by updating register of members.
What procedural step must be taken if pre-emption rights are disapplied, or MA’s are altered, via SR?
If rights disapplied, or MA is altered, company must file copy of SR within 15 days.
