Companies FAQ

Q. What are shares and how do they affect a limited company?

Shares are a way of putting capital into your company. They also determine the level of control the shareholders (share owners) have over its operations through voting power.

Deciding how you divide the shares is vitally important; you need over 50% of the shares in order to fully control the company.

Since October 2009 all companies need to provide a statement of capital on incorporation. The statement of capital sets out the nominal value of the shares, the currency and the aggregate value of issued capital and sums paid. The percentage of the issued share capital owned by each shareholder determines their interest in the company. If you would prefer a controlling interest in the company you must own over 50% of the shares in issue.

Q. What are share certificates and what details must they include?

Share certificates are receipts issued to shareholders for each share purchase made. You must include the following details on your share certificates:

The company name
The type of share you are issuing
The name and address of the shareholder
The number of shares (in words) that are to be assigned to the shareholder
The value of the share
A signature from a director and secretary (where appointed) of the company

Q. What is the difference between shareholders and directors?

The directors are responsible for the day to day running of the company and ensuring it meets its responsibilities and deadlines. The shareholders own the company and have the right to vote on many issues. The extent of ownership and level of voting rights are based on the percentage of issued shares they own. An individual can be both a director and shareholder of a company.

Q. Is it possible to have more than one type of share?

Whilst most UK limited companies usually have just one class of share, it is possible and often necessary for a company to have two or more distinct groups of equities in existence at any one time by creating additional classes of shares.

For example, a company could have a share capital consisting of:

100 ‘A’ shares of £1 each
100 ‘B’ shares of £1 each
100 ‘C’ shares of £1 each

Each of these classes of share can operate independently of each other. There is no requirement to issue shares from the different classes at the same time or in the same proportions and dividends can be payable on each class of shares at different rates

The individual rights relating to each class of share could potentially differ in one or more of the following ways:

Their voting rights
Whether they can receive dividends
Payouts received on winding up

There is no statutory limit which restricts the number of groups which a company can create provided the correct procedures are followed. These procedures include the necessary company resolutions and board minutes authorising the issue of additional classes of shares.

Q. What types of shares are there?

There are four main types of shares:

Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.

Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category have a fixed value, which means that a shareholder would not benefit from an increase in the business' profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.

Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business.

Redeemable shares come with an agreement that the company can buy them back at a future date - this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

Q. Do shares have to be paid for in full?

No. Although the purchase of shares can be a method of injecting capital into a new company it is not essential to pay for any issued shares in cash and they can be considered paid up at the point of issue.

Q. What do I need to consider when issuing shares?

Shares can be issued by the directors provided that they have the authority to do so. This authority is given either in the articles of association or by ordinary resolution of the members in a general meeting. The authority conferred must state the number of shares which the directors are authorised to issue and the time period during which the authority is to last.

Statutory pre-emption rights

Even where the directors have the necessary authority to issue shares, they cannot necessarily issue them to whomever they may choose. The law provides that where shares are issued in exchange for cash, the shares must first be offered to the existing members of the company in proportion to the existing shareholdings.

The statutory pre-emption rights can be removed either by an article in the company's articles of association or by a special resolution of the members. There are two ways of disapplying pre-emption rights with a special resolution. The directors may seek a general authority to allot shares free of pre-emption requirements or they can seek a specific authority for a particular purpose. If the directors wish to remove the pre-emption rights by members' special resolution for a specific allotment, they have to send to all members a written statement setting out their reasons for proposing the special resolution, the consideration that the company is to receive and their justification of the amount.

Q. How do I issue shares?

Subject to the rules relating to share issue being adhered to the easiest and quickest way to notify Companies House of a share allotment is online via WebFiling, however, if you do not have the facility to file online you can download an allotment form SH01 , and on completion send to Companies House, Crown Way, Cardiff CF14 3UZ