Share Capital plays a very important role in the structure of a limited company. Each company, with share capital, has both authorised and issued shares, which can be used to raise finance, determine ownership and transfer ownership from one party to another. A share itself is a unit of ownership in a company, which has an accumulation of rights, interests and obligations. Owning a share does not necessarily mean that you have direct control over the day to day operations of a business, particularly if you only hold a small percentage of the issued share capital, however it does entitle you to an equal distribution of any profits declared in the form of a dividend. To help you gain a better understand of share capital we will review some of the key terms associated with it.
1. Authorised Share Capital
Authorised share capital is the maximum number of shares which a company is entitled to issue to shareholders and is set out in the Memorandum and Articles of Association of a company. The Memorandum and Articles of Association of a company are issued on incorporation and set out the constitutional and internal rules of the company. A company’s authorised share capital is generally either 100,000 or 1,000,000 ordinary shares of €1.00 each. In the UK the concept of authorised share capital was abolished in October 2009 and as such there is no restriction on the number of shares which a UK company can issue, unless of course it is restricted in the Articles of Association.
2. Issued Share Capital
A company’s issued share capital are those shares that have been allotted or issued to shareholders. When a company is formed the individuals who formed the company will usually obtain the first shares. As the company progresses, additional shares may be issued for the following reasons:
- Introduction of new investment or investors
- Amendment of the rights attaching to shares
- Resolution of shareholder disputes
- Succession planning
- Creation of a group structure
3. Increasing A Company’s Authorised Share Capital
A company can increase its authorised share capital with the approval of its shareholders. Such an increase would require the passing of an ordinary resolution and a special resolution if the share capital clause is being amended. The process for increasing a company’s authorised share capital is governed by Section 68(a) of the Companies Act 1963. Once the increase has been approved, the following documents are required to be submitted to the Companies Registration Office:
- Form B4 – Notice of Increase in Authorised Share Capital
- Form G2 – Ordinary Resolution
- Form G1 and a copy of the Special Resolution passed by the shareholders, if applicable
- Amended Memorandum and Articles Of Association reflecting the increased Authorised Share Capital and the rights attaching to the new shares, if applicable.
4. Rights Attaching To Share Capital
A company may have different classes of shares, with varying nominal values and rights attaching to each. The most typical class of shares are “Ordinary Shares”, which generally have the following rights:
- The right to receive notice of, attend and vote at general meetings
- The right to participate in the profits of the company by way of a dividend
- The right to the capital surplus on a winding-up of a company
- The right to notice and information from the company
The rights attaching to issued share capital are generally laid out in Table A, however the Articles of Association should also be review to identify any amendments to such rights. As ordinary shareholders are generally the last participators to receive a dividend or return of capital, when investors such as Enterprise Ireland or venture capital companies make an investment they normally request preference shares in return for their investment. As the name suggests, preference share holders would receive a return ahead of ordinary share holders.
5. Transfer of Share Capital
Shareholders have the ability to transfer all or part of their shareholding to other shareholders or third parties. The transfer of share capital is executed through a stock transfer form which in most cases is required to be signed by both the transferor and the transferee. The transfer of share capital is covered by section 79 to 90 of the Companies Act 1963 and Regulations 22-8 of Table A. Before a transfer is completed it is recommended that the Memorandum and Articles of Association are reviewed for any pre-emption rights or restrictions on transfers. Stamp duty is payable on any transfer where the value of the consideration or the market value exceeds €1,000. The current rate of stamp duty is 1% and this must be processed and paid to the Revenue Commissioners through the Revenue Online System (ROS) before the transfer is complete. Once a transfer is completed, the signed stock transfer form and share certificate should be presented to the company for approval. Once approved the following is required to be completed:
- The register of members to be updated to reflect the changes in shareholders
- The register of transfers to be updated to reflect the transfer of shares
- A new share certificate should be signed, sealed and issued.
- The old share certificate should be cancelled
6. Raising Finance Through Share Capital
As mentioned above share capital is used for a variety of reasons, however the issuing of share capital to raise finance is probably the main reason why companies would issue additional shares. In our recent blog “5 Sources of Business Finance Now That the Economy is Picking up” we outline the various options available to companies seeking finance, one of which being the issuing of shares to raise equity. As outlined above, if you are seeking funding from Enterprise Ireland or venture capital companies you may need to alter your share capital to incorporate preference shares. While the authorised share capital, as per the Memorandum and Articles of Association, may not include preference shares, such a share class can be create through the passing of a special resolution.
Generally when a new class of shares is created the authorised share capital of the company will be increased (see above) and these new shares would be used to create the new class of shares. In addition to the steps and forms outlined above in relation to the increase of the authorised share capital, the company would need to pass a special resolution to create the new class of shares and approve the rights attaching to such shares. Once this is completed the documents outlined above under point 3, Increasing A Company’s Share Capital, would be required to be submitted to the Companies Registration office. While your company’s share capital may not change throughout the life of your business it is good to have an understanding your share capital and how it can be used. Share capital can be a very effective tool when raising finance or implementing a tax plan for your business.
As a company director, you should be aware of the relevant minutes, resolutions and submissions required in relation to your share capital. It is also important that any changes are approved by the appropriate parties, as failure to correctly record the relevant information may lead to such changes having no legal effect and reliefs obtained through tax planning may be clawed back by the Revenue Commissioners.
Related content
