Shares are the building blocks of company ownership. Understanding share capital is essential because it determines who owns the company, how profits are distributed, and who controls decision-making. Whether you're advising on a startup raising investment or a listed company doing a rights issue, you need to master these concepts.
Three big themes in this topic: (1) How shares are CREATED and ISSUED (allotment), (2) What RIGHTS different shares carry, and (3) How the law PROTECTS share capital (capital maintenance). Get these three themes clear, and everything else falls into place.
Share capital is the money raised by a company through issuing shares. When you buy shares, you're giving the company money in exchange for a stake in it. The company uses this capital to fund its operations. Unlike a loan, share capital doesn't have to be repaid - but shareholders expect returns through dividends and share value growth.
Every share has a nominal (or par) value - say £1. But shares are often SOLD for more than this. If you issue a £1 share for £5, the extra £4 is 'share premium'. The nominal value is really just an accounting concept - a £1 share in Apple isn't worth £1! The MARKET value is what matters commercially.
Shares must NEVER be issued at a discount to their nominal value (s.580 CA 2006). A £1 share must be sold for at least £1. You can sell it for more (creating premium), but never for less. This protects creditors who rely on the capital being real.
Ordinary shares are the 'standard' share type. Ordinary shareholders are the real owners of the company - they carry the risk and the reward. They get dividends IF the company declares them (not guaranteed), and they vote on company decisions. If the company is wound up, they get what's left AFTER everyone else is paid - which might be nothing!
Preference shares get preferential treatment in some way - usually a fixed dividend paid BEFORE ordinary shareholders get anything. They're like a hybrid between shares and debt. The trade-off? Preference shareholders usually have limited or no voting rights, and their dividend is capped (they don't benefit from exceptional profits).
| Feature | Ordinary | Preference |
|---|---|---|
| Dividend | Variable (if declared) | Fixed (priority) |
| Voting rights | Yes (usually) | Limited/None |
| Risk | Higher | Lower |
| Upside potential | Unlimited | Capped |
| Winding up priority | Last | Before ordinary |
Allotment is the process of creating and issuing new shares. When a company allots shares, it's creating new ownership stakes and (usually) raising new capital. This is different from TRANSFERRING existing shares between shareholders - allotment creates NEW shares.
Directors need AUTHORITY to allot shares (s.550-551 CA 2006). For private companies with one class of shares, directors have automatic authority under s.550. For other companies, authority must come from the articles or a shareholder resolution. This authority can be limited by amount or time period.
Directors of a private company with only one class of shares may allot shares of that class without specific authorisation, unless the articles prohibit this.
Pre-emption rights (s.561 CA 2006) protect existing shareholders from DILUTION. When new shares are issued, existing shareholders get first refusal - they can buy new shares in proportion to their existing holdings. This stops the company issuing shares to outsiders and reducing existing shareholders' percentage stakes.
A company must not allot equity securities to a person unless it has first offered them to existing shareholders on the same or more favourable terms, in proportion to their holdings.
Imagine you own 20% of a company. The company wants to issue 100 new shares. Pre-emption rights mean YOU get first offer on 20 of those shares (your proportionate share). If you buy them, you stay at 20%. If you don't, your stake gets diluted because others now own more of the bigger pie.
Pre-emption rights can be disapplied by special resolution (75%) under s.569-571. Private companies can disapply them in their articles. This is common when companies want flexibility to bring in new investors quickly without going through the full pre-emption process.
Shares can be paid for in cash or 'money's worth' - meaning non-cash consideration like property, goods, or services. For PRIVATE companies, there's flexibility - you can accept almost any consideration. For PUBLIC companies, the rules are much stricter.
Remember: a public company (plc) must have at least £50,000 allotted share capital before it can trade, with at least 25% paid up (£12,500 minimum). This is checked before the trading certificate is issued.
Dividends are distributions of profits to shareholders - the reward for investing. Unlike interest on a loan, dividends are NOT guaranteed. The company chooses whether to pay them and how much. Directors recommend dividends, shareholders approve (or reduce, but not increase) them.
Here's the crucial rule: dividends can ONLY be paid out of DISTRIBUTABLE PROFITS (s.830 CA 2006). What counts? Accumulated realised profits minus accumulated realised losses. You cannot pay dividends out of capital - that would be returning shareholders' money and cheating creditors.
A company may only make a distribution out of profits available for the purpose. These are accumulated, realised profits (so far as not previously distributed or capitalised) less accumulated, realised losses.
If a dividend is paid when there aren't sufficient distributable profits, it's an unlawful distribution. Directors who authorised it may be personally liable. Shareholders who KNEW (or had reasonable grounds to believe) it was unlawful must repay it.
Capital maintenance is a fundamental principle: once capital is put into a company, it should stay there (or be used for business purposes) - not returned to shareholders at creditors' expense. Creditors can't recover from shareholders due to limited liability, so the law protects the capital 'cushion'.
Sometimes companies need to reduce their share capital - perhaps to return excess cash to shareholders, cancel shares, or write off losses from the balance sheet. Because this potentially harms creditors (less capital cushion), there are strict procedures.
Private companies have two options: (1) Court approval (old method) - court checks creditors are protected, or (2) Solvency statement procedure (s.641-644) - directors sign a statement that the company can pay its debts for 12 months, no court needed. Public companies must use the court procedure.
A solvency statement is a statement by all directors that they have formed the opinion that there is no ground to suspect the company cannot pay its debts, and will be able to pay its debts for 12 months after the reduction.
Generally, a company cannot buy its own shares - this would be returning capital to shareholders. BUT there are exceptions: companies can buy back shares if authorised by their articles and following the correct procedure. The purchased shares are usually cancelled.
Shareholders have various rights - some from statute, some from the articles. The exact rights depend on the class of shares held. But even minority shareholders have important protections in law.
| Threshold | Right/Power |
|---|---|
| 5% | Requisition a general meeting |
| 5% | Require circulation of statement |
| 10% | Demand a poll vote |
| 15% | Apply to court to cancel variation of class rights |
| 25%+ | Block special resolutions |
| 50%+ | Pass ordinary resolutions |
| 75%+ | Pass special resolutions |
When a company has different share classes (e.g., ordinary and preference), each class may have different rights. These 'class rights' are protected - you can't just vote to take away preference shareholders' rights using ordinary shareholder votes. The class must consent.
Rights attached to a class of shares may only be varied in accordance with the articles, or (if no provision) by consent of 75% of that class or a special resolution at a separate class meeting.
Even after a class rights variation is approved, holders of 15% or more of that class (who didn't vote for it) can apply to court to have the variation cancelled. This is a valuable protection for minorities within a class.
Share capital = ownership of the company. Ordinary shares = full risk/reward, voting rights. Preference shares = priority dividend, limited upside. Pre-emption rights protect against dilution. Dividends only from distributable profits. Capital maintenance protects creditors. Directors need authority to allot shares.
Common exam scenarios: (1) Can directors allot these shares? Check s.550/551 authority. (2) Can this dividend be paid? Check distributable profits. (3) Do pre-emption rights apply? Yes unless disapplied. (4) Is this share issue valid? Check not below nominal value. Remember: Plcs have stricter rules than private companies throughout.