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COMPANY FORMATION IN ENGLAND: AUTHORISED, ISSUED AND CALLED UP SHARE CAPITAL, TYPES OF SHARES IN BRIEF:

The nominal value of the share normally fixes the amount which the shareholder is required to contribute to the assets of the company. One of the results of the doctrine of separate personality is that members of a corporation are not personally liable for corporate debts unless they agree to such liability. In the case of companies registered under the Companies Acts, they are only granted the privilege of incorporation on the basis of their members accepting a limited degree of liability for corporate debts. Section 1(2) of the Companies Act 1985 provides that "members' liability is limited to the amount (if any) remaining unpaid on their shares."

Shareholders must pay at least the full nominal value of any shares issued to them (i.e., shares must not be issued at a discount s.100). Where, however, the company issues shares at a premium, i.e., at more than the nominal value of the shares, as is quite common, then the holders of those shares will be liable to pay the amount owed, over and above the nominal value. The excess will still form part of the company's capital but will be included in a distinct share premium account (s.130) and may only be used for limited purposes.

Section 135 (1) allows a company to reduce its share capital "in any way" and should be interpreted as meaning "for any purpose". The Court will require that it be informed of the specific purpose for the reduction by way of evidence from an officer of the company. For example, should the sole purpose be to save stamp duty, that may not be sufficient justification for a court to grant consent to the capital reduction. Conversely, a transaction that has an incidental effect of saving stamp duty will not however prevent the court granting consent.
Finding and Using Information on This Page:  Shares and Capital | Limited Liability | What is Limited Company Share Capital? | Issued or Allotted Capital | Paid-Up Capital | Consolidation of Shares | Subdivision of Shares | Conversion of Shares into Stock | Effect of Alterations of Capital on Voting Rights | Limited Liability Company Membership | Single-Member Companies | Minors as Members of a Company | Allotment | Procedure for the Transfer of Non-Cash Consideration | Nominee Shareholding | Payment for Shares | 

The memorandum of association of a limited company states the amount of authorised or nominal share capital. It also says how the share capital is divided into individual shares of a set amount, such as £1.00 a share. There are no upper or lower limits on authorised share capital for private limited companies, but a public limited company (plc) must have an authorised share capital of at least £50,000. A company can increase its authorised share capital by passing an ordinary resolution at a general meeting. Equally, a company can decrease its authorised share capital by passing an ordinary resolution to cancel some shares - this is called 'diminution of capital'.

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Nominal or authorised capital: this is the figure required to be stated in the company's memorandum of association. It sets the maximum number of shares that the company can issue together with the value of each share (s.2 (5)). Shares in United Kingdom companies are required to have some nominal value: no par value shares, as are found in other jurisdictions, such as the USA, are therefore not permitted in the UK, although the shares need not be valued in Sterling.

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UNITED KINGDOM LIMITED COMPANIES SHARES AND CAPITAL

A Company is Owned by its Shareholders:
Companies without a share capital will have some other method of determining ownership. The overwhelming majority of companies have a share capital consisting of one or more classes of shares. Company law and company lawyers have been extremely hesitant in offering any precise legal definition of the share, being content to deal with shares in a pragmatic rather than a theoretical manner.

The most generally accepted definition of the share states that it represents: "the interest of the shareholder in the company measured by a sum of money, for the purposes of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders" (Borland's Trustees v Steel (1901)). The three elements of this definition will be examined in turn, followed by a consideration of the most common types of shares.

LIMITED LIABILITY

The nominal value of the share normally fixes the amount which the shareholder is required to contribute to the assets of the company. One of the results of the doctrine of separate personality is that members of a corporation are not personally liable for corporate debts unless they agree to such liability. In the case of companies registered under the Companies Acts, they are only granted the privilege of incorporation on the basis of their members accepting a limited degree of liability for corporate debts. Section 1(2) of the Companies Act 1985 provides that "members' liability is limited to the amount (if any) remaining unpaid on their shares."

Shareholders must pay at least the full nominal value of any shares issued to them (i.e., shares must not be issued at a discount s.100). Where, however, the company issues shares at a premium, i.e., at more than the nominal value of the shares, as is quite common, then the holders of those shares will be liable to pay the amount owed, over and above the nominal value. The excess will still form part of the company's capital but will be included in a distinct share premium account (s.130) and may only be used for limited purposes.

WHAT IS LIMITED COMPANY SHARE CAPITAL?

When a company is formed, the person or people forming it decide whether shares will limit its members' liability. 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.

In a company limited by shares, the company's Memorandum of Association has a capital clause which states the amount of the share capital by which the company proposes to be registered and its division into shares of a fixed amount. The amount of share capital with which a company is initially registered (or the amount to which it may subsequently be increased) is the AUTHORISED or NOMINAL capital of the company. It sets the maximum number of shares that the company can issue together with the value of each share (s. 2 (5)).

Shares in limited companies are required to have some nominal value: no par value shares, as are found in other jurisdictions, such as the USA, are therefore not permitted in the UK, although the shares need not be valued in Sterling. There is no requirement that companies issue shares to the full extent of their authorised capital. It is important, therefore, not to assume that the authorised capital represents a meaningful statement of the company's true capital.

For example, a company with a capital clause stating it has £1,000.00 share capital of £1.00 each has an authorised (or nominal) share capital of £1,000.00 divided into 1,000 £1.00 shares. The authorised share capital refers to the maximum number of shares available for issue and the nominal value of each share. Once a company has begun trading the actual value of the shares will vary depending on the success of the trading activities, but the nominal value of the shares does not change. Authorised share capital can only be increased with the approval of the existing shareholders by ordinary resolution.

There is NO maximum to any company's authorised share capital and NO minimum share capital for UK private limited companies. However, a public limited company must have an authorised share capital of at least £50,000.

ISSUED OR ALLOTTED CAPITAL

Issued capital is that part of the company's total authorised or nominal capital which has been issued and taken up by the members of the company, having been issued either for cash or for a consideration other than cash, and is expressed by reference to the aggregate nominal value of the shares issued. The amount of issued capital cannot exceed the amount of the authorised capital.

Accordingly, a company with an authorised capital of 1,000 £1.00 shares which issues 250 of the shares has an issued share capital of £250.00. A private 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 start business or borrow.

PAID-UP CAPITAL

This is the proportion of the nominal value of the issued capital actually paid by the shareholder. It may be the full nominal value, in which case the share is said to be fully paid up and it fulfils the shareholder's responsibility to outsiders. Alternatively the share may be only partly paid up, in which case the company has an outstanding claim against the shareholder. Shares in public companies must be paid up to the extent of at least a quarter of their nominal value (s.101 of the Companies Act 1985).

Where a company has issued shares as not fully paid up it can at a later time make a call on those shares. This means that the shareholders are required to provide more capital, up to the amount remaining unpaid on the nominal value of their shares. Called capital should equal paid-up capital: uncalled capital is the amount remaining unpaid on issued capital.

The following could be a theoretical capital structure for a public limited company:
Authorised capital:- £100,000
Issued capital:- £50,000
Paid-up capital:- £12,500

Legal definitions usually state that the share is a form of property representing a proportionate interest in the business of the company, but tend to be much less certain as to the precise nature of such an interest. What is clear is that, as a consequence of separate personality, the share does not represent, in any other than a very contingent way, a claim against the assets owned by the company. What shareholders possess is not a right to own and control the capital assets operated by their company, but rather a right to receive a part of the profit generated by the use of those assets. As CB McPherson put it:

"The market value of a modern corporation consists not of its plant and stocks of material but its presumed ability to produce a revenue for itself and its shareholders by its organisation of skills and its manipulation of the markets. Its value as a property is its ability to produce a revenue. The property its shareholders have is the right to a revenue from that ability."

It also has to be recognised that even this right is contingent upon the company making a profit and the directors of the company recommending the declaration of a dividend. Section 182 of the Companies Act 1985 provides that shares are personal property and are transferable in the manner provided for in the company’s articles of association.

Changes to Capital:
The Companies Act 1985 lays down procedures for the alteration of a company's share capital (Section 121). In practice, most company secretaries will be involved at some time in an increase in authorised share capital either by creating new shares of an existing class or by creating a new class of shares.

When creating a new class of shares, the resolutions required to increase the authorised capital must also include a resolution to amend the Articles of Association to set out the rights and privileges differentiating the classes. Other changes to the share structure permitted by the Act are consolidation of shares; subdivision of shares, conversion of shares into stock and vice versa, cancellation of unissued shares (Section 121) and reduction of capital (Section 135). No other alterations are permitted.

One alteration which is frequently requested by directors, but not permitted, is the conversion of non-redeemable shares into redeemable shares or vice versa. This problem can usually be overcome by undertaking a re-purchase of shares by the company and by the shareholder (s) making application for the issue of redeemable shares (or vice versa) and using the consideration monies to effect the purchase.

The power to make alterations to capital must be contained in the company's Articles of Association. If no provision has been made in the Articles, they can be amended by special resolution by the company in general meeting, to enable the alteration to capital to be made. The requisite authority to alter share capital is contained in Table A, Regulation 32 and is usually incorporated in a company's Articles of Association.

The resolutions to authorise alteration of the share capital and to alter the capital can be put at the same meeting. The second resolution would have to be conditional on the first being approved or could form a sub-clause of the same resolution. The company in general meeting passes an ordinary resolution to effect the desired change in capital together with a special resolution to change the articles if required. A reduction of capital can only be carried out by a special resolution of the company and must also be confirmed by the court (Section 135). There is also a procedure set out in the Act for a company's capital to be reorganised under a scheme of arrangement.

Procedure for increase of authorised capital. Subject to provisions in the company's Articles of Association the authorised capital may be increased by an ordinary resolution using the following procedure:

The directors, at a board meeting, resolve to recommend the proposed increase in capital, authorise the issue of a notice convening an extraordinary general meeting to pass the resolutions required and to approve a circular for issue to members explaining the reasons for the increase. Instead of convening a separate extraordinary general meeting it may be possible to include the resolutions as special business at the company's next annual general meeting.

In addition to the normal requirements for listed companies to submit copies of notices, proxy forms and circulars to a Regulatory Information Service and the United Kingdom Listing Authority no later than their issue to shareholders, when changes to the company's share capital are proposed a Regulatory Information Service must be notified without delay.

A print of the ordinary resolution suitable for filing with the Registrar of Companies MUST also be prepared for signature by the chairman of the company or the chairman of the meeting.

After the resolution has been passed, a certified copy must be filed with the Registrar of Companies within 15 days together with Form G123. It is also usual to send a copy of the Memorandum of Association to the Registrar with the capital clause appropriately amended. In the case of a listed company, two copies of the resolution and of the updated Memorandum, if one has been prepared, should be sent to the UK Listing Authority.

A print of the resolution must be attached to all copies of the Memorandum of Association held in stock and sent to directors and others concerned with the administration of the company (e.g. the auditors) who are in possession of copies of the company's Memorandum and Articles. At the same time as increasing the company's share capital, it is important to give the directors authority to allot the shares and to consider whether pre-emption rights should be waived.

The authority of the directors to allot shares is contained in the Articles of Association and derives from Section 80. Any existing authority whether contained in the Articles or given by resolution of the shareholders will only extend to unissued shares in existence when that authority was given or renewed. Accordingly, it is common practice for a resolution authorising the directors to issue the newly created shares to be proposed at the same meeting.

Companies whose Articles contain pre-emption provisions for existing shareholders will usually grant the directors authority in terms of Section 80 for a five-year period, the maximum period allowed under the legislation (this can be extended indefinitely by elective resolution of a private company (Section 80(A)). Listed companies usually seek an annual authority in terms of Section 80 to enable the issue of an additional one-third of the issued share capital.

Renewal or extension of this Section 80 authority requires an ordinary resolution. If the company's Articles do not contain pre-emption provisions, such authority should be limited to a relatively small amount or not given at all. By withholding authority the shareholders retain for themselves the decision on which persons may become additional members or increase their own holdings.

If the Articles do contain pre-emption rights and the share capital is being increased -with the intention of issuing shares immediately either to non-shareholders or not pro rata to existing shareholders, then the pre-emption rights may be waived by special resolution. Such waiver is normally given for a limited number of shares and for a short period of, say, one month. Listed companies normally seek an annual waiver of pre-emption rights over the issue of an additional 5% of the issued share capital.

CONSOLIDATION OF SHARES

The share capital of a company may be consolidated if the Articles permit. Consolidation means that the shares of the co