This booklet is an initial guide to quite a complex subject. It cannot replace professional advice. It:
- explains the basics of share capital;
- applies to all companies incorporated in England, Wales or Scotland with a share capital, whether private or public;
- tells you what information must be delivered to Companies House;
- covers the regulation of: authorised share capital, allotment and cancellation of shares; types of shares, restructuring share capital and share transfer
What is share capital?
When a company is formed, the person or people forming it decide whether its members' liability will be limited by shares. The memorandum of association (one of the documents by which the company is formed) will state:
- the amount of share capital the company will have; and
- the division of the share capital into shares of a fixed amount.
The members must agree to take some, or all, of the shares when the company is registered. The memorandum of association must show the names of the people who have agreed to take shares and the number of shares each will take. These people are called the subscribers.
What is authorised capital?
The amount of share capital stated in the memorandum of association is the company's 'authorised' capital.
Is there a maximum and minimum share capital?
There is no maximum to any company's authorised share capital and no minimum share capital for private limited companies. However, a public limited company must have an authorised share capital of at least £50,000 (and, if it is trading, issued capital of £50,000).
Can a company alter its authorised share capital?
A company can increase its authorised share capital by passing an ordinary resolution (unless its articles of association require a special or extraordinary resolution). A copy of the resolution - and notice of the increase - must reach Companies House within 15 days of being passed. Please see
A company can decrease its authorised share capital by passing an ordinary resolution to cancel shares which have not been taken or agreed to be taken by any person. Notice of the cancellation, must reach Companies House within one month.
What is issued capital?
Issued capital is the value of the shares issued to shareholders. This means the nominal value of the shares rather than their actual worth. The amount of issued capital cannot exceed the amount of the authorised capital.
A company need not issue all its capital at once, but a public limited company must have at least £50,000 of allotted share capital. Of this, 25% of the nominal value of each share and any premium must be paid up before it can can get a trading certificate allowing it to commence business and borrow.
What is certificate to commence business and borrow?
To obtain a trading certificate, a new company incorporated as a plc, must deliver a statutory declaration confirming that its share capital is at least the statutory minimum. The Registrar will then issue a certificate entitling it to do business and borrow .
Can a company increase its issued capital?
A company may increase its issued capital by allotting more shares but only up to the maximum allowed by its authorised capital. Allotments must only be done under proper authority.
- A public company may offer shares to the general public. Share offers to the public are made in a prospectus or are accompanied by listing particulars.
- A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses.
Can a company reduce its issued capital?
A company cannot normally reduce its issued capital as this is the personal property of the shareholders, not of the company. However, the following exceptions apply:
- if a court order confirms a 'minute of reduction' following a special resolution of the company;
- if shares are redeemed (bought back) in accordance with a redemption contract;
- if the company's articles allow it to buy its own shares and this purchase is authorised by a special resolution. A public company whose shares are listed on a recognised investment exchange can either cancel those shares or hold them ‘in treasury’ for resale or transfer to an employees’ shares scheme at a later date. In all other cases the shares are regarded as cancelled when the company buys them back, although this does not reduce the company’s authorised share capital.
What does the allotment of shares mean?
'Allotment' is the process by which people become members of a company. Subscribers to a company’s memorandum agree to take shares on incorporation and the shares are regarded as 'allotted' on incorporation.
Later, more people may be admitted as members of the company and are allotted shares. However, the directors must not allot shares without the authority of the existing shareholders. The authority will either be stated in the company's articles of association or given to the directors by resolution passed at a general meeting of the company.
Nominal value and share premium
A company's authorised share capital is divided into shares of a nominal value. The real value of the shares may change over time, reflecting what the company is worth, but their nominal value remains the same. When the company sells shares for more than their nominal value, the actual sum paid will be in two parts - the nominal value and a share premium. The share premium must be recorded separately in the company's financial records in a 'share premium account'.
Must shares be fully paid-up at the time of allotment?
No. Payment may be deferred until later. However, shares allotted in a public company must be paid-up to at least a quarter of their nominal value and the whole of any premium (except that this does not apply to shares allotted under an employees' share scheme, that is, a scheme for encouraging share ownership by employees, former employees and their families).
As a general rule, a company may allot bonus shares to members as fully paid-up. A company which has funds available for the purpose may also pay up any amounts unpaid on its shares.
A company's shares must not be allotted at a discount (that is, for an amount less than the nominal value of the shares).
Must payment for shares be in cash?
No, it can be in goods, services, property, good will, know-how, or even shares in another company. The latter is often used when one company takes over another. It also includes cash payments to any person other than the company allotting the shares.
Public companies are more restricted in what they may accept in payment for shares and non-cash payments must be valued before shares are allotted (except in the case of bonus issues, mergers or arrangements whereby shares in another company are cancelled or transferred to the company). A copy of the valuation report must be delivered to Companies House .
Generally shares may be allotted for payment:
- wholly for cash;
- partly for cash and partly for a non-cash payment; or
- wholly for a non-cash payment.
Paid up in cash
A share is paid up in cash if the amount due is received by the company (in cash or by cheque, or the company has been released from a liquidated liability) or an undertaking has been given to pay cash to the company at a future date. ‘Cash’ includes foreign currency.
Acquiring shares for a non-cash payment involves the transfer of property, which may amount to a chargeable transaction under the Stamp Acts.
Are there different types of shares?
A company may have as many different types of shares as it wishes, all with different conditions attached to them. Generally share types are divided into the following categories:
- Ordinary - as the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value.
- Preference - these shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.
- Cumulative - preference These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.
- Redeemable - these shares are issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot have redeemable shares only.
Can shares be in any currency?
Yes, and different types of share may be in different currencies. However, a public limited company must have at least £50,000 of its issued capital in sterling, irrespective of what other currency it uses.
Can a company change the currency of its shares?
No, not directly. However, a company may purchase its own shares and allot shares in a different currency or it may seek a court order to reduce its issued capital to zero, cancel its authorised capital, and simultaneously create capital and allot shares on a proportional basis in the new currency. Remember that a public limited company must always have a sterling share capital of at least £50,000.
Can a company change its shares?
If authorised by its articles of association, a company may pass an ordinary resolution to:
- consolidate and divide its share capital into shares of larger amounts than its existing shares, for example 200 shares of £1 may be consolidated and divided into 100 shares of £2;
- sub-divide its shares, or any of them, into shares of smaller amounts, for example, a £1 share may be divided into 10 shares of 10p;
- convert all or any of its paid-up shares into stock or re-convert stock into shares. A company cannot issue stock in the first instance. It can only convert issued shares into stock. (Converting shares into stock means treating them as one merged fund equivalent to the nominal value of the individual shares. For example, 100 shares of £1 each would convert to £100 stock.)
In all the above cases, the total authorised and issued share capital remains unaltered. Notice of the change must reach Companies House.
Can I buy shares from someone else?
Shares in a public company are normally transferred through a broker dealing in the market appropriate to those shares, usually, the London Stock Exchange or the Alternative Investment Market. However, shares may be transferred directly from seller to buyer and the company informed accordingly.
Shares in a private company are usually transferred by private agreement between the seller and the buyer. In both cases, a transfer document must be completed. The articles of association of private companies often place restrictions on the transfer of shares that must be observed.
The transfer of shares is normally a chargeable transaction under the Stamp Act. Stamp Duty is payable to the Inland Revenue on the aggregate amount at ½% rounded up to the nearest multiple of £5.
How are shares transferred to new owners?
The transfer of shares in a public limited company is usually dealt with through a broker.
To transfer shares in a private or unlimited company, a seller must complete and sign the appropriate section of a 'stock transfer form' and pass it, together with the share certificate, to the new owner.
The new owner must then complete their section of the stock transfer form, pay any stamp duty to the Inland Revenue and pass the completed form and share certificate to the company. The company secretary then arranges for the directors to authorise the change to the members' register and issues a share certificate in the new name.
What is a transmission of shares?
In some instances shares may be transmitted by operation of law. The main examples of this are when a registered shareholder dies or becomes bankrupt.
On death, shares held in the sole name of the deceased are vested in the personal representative or executor of the deceased. This person should inform the company and provide the necessary evidence so that the fact can be registered and the personal representative can receive all notices and dividends relating to the shares. The articles of association of companies often provide that a personal representative cannot exercise the votes attaching to the deceased’s shares until he or she is registered as the holder of the shares.
On the winding up of the deceased's estate, the personal representative must inform the company of the beneficiary (or beneficiaries) of the shares so that the necessary alterations to the register of members may be made and new certificates issued.
If a share is jointly held, the survivor(s) will be the only person(s) recognised as having title to the share. The company should be informed immediately and be given any necessary evidence of the death in order to alter the register of members and issue a new share certificate.
The position of a bankrupt shareholder is similar. Until a new member is registered, the rights to dividends are vested in the trustee in bankruptcy. The bankrupt may remain a member and be able to vote, but only in accordance with the directions of the trustee. This is so where the name of the bankrupt shareholder remains on the register, but the trustee generally has a right under the company's articles of association to apply to be registered as a member in respect of the bankrupt's shares.
Any restrictions on the transfer of shares contained in the company’s articles will normally apply to a transfer or application resulting from the death or bankruptcy of a shareholder.
What are share warrants?
A share warrant is a document which states that the bearer of the warrant is entitled to the shares stated in it. If authorised by its articles, a company may convert any fully paid shares to 'share warrants'. These warrants are easily transferable without any need for a transfer document; that is, they can simply be passed from hand to hand.
When share warrants are issued, the company must strike out the name of the shareholder from its register of members and state the date of issue of the warrant and the number of shares to which it relates. Subject to the articles, a share warrant can be surrendered for cancellation. If so, the holder is entitled to be re-entered into the register of members. Vouchers are usually issued with the share warrants in order that any dividends may be claimed.
The holder of a share warrant remains a shareholder but whether they are a member of the company depends on the articles of the company. A company which converts all its shares to share warrants should be careful: it could become a memberless company and therefore cease to exist.
What happens if a share certificate is lost?
This will be dealt with in the company's articles.
The directors will normally require the holder to give up any defaced or worn-out certificate and to sign an indemnity about the use of any lost or destroyed certificate. They may also require the holder to pay any reasonable expenses for investigating any evidence of loss.
Can a share be cancelled if the holder cannot be traced?
No. The share belongs to the registered holder, not the company. If a person is eventually declared legally dead, then the share should be transmitted to the beneficiary (or beneficiaries).
If authorised by its articles, a company may retain any dividends that remain unclaimed after a certain period.
What is paid-up capital, uncalled capital, reserve capital and share premium?
These terms are used to describe the make-up of a company's share capital:
- paid-up capital is the issued capital which has been fully or partly paid-up by the shareholders;
- uncalled capital is that part of the issued capital on which the company has not requested payment;
- reserve capital is that part of the share capital that the company has decided will only be called up if the company is being wound up and for the purposes of it being wound up;
- share premium is the excess paid above a share's nominal value. This excess must be recorded separately in the company’s financial records in a 'share premium account' and used for the purposes specified in Section 130 of the Companies Act 1985 (for example, in paying up unissued shares to be allotted to members as fully paid-up bonus shares.)
As an example: if a company issues 1,000 shares with a nominal value of £1 each, paid-up to 20% of their nominal value with a 10% reserve and a share premium of 50p, the capital is:
paid-up capital = £200 (1,000 x £0.20)
reserve capital = £100 (1,000 x £0.10)
uncalled capital = £700 (1,000 x £0.70)
share premium = £500 (1,000 x £0.50)