Allotting and issuing new shares for private limited companies in England and Wales

Authority to allot new shares

In general, directors cannot allot shares without authority under Sections 550 or 551 of the Companies Act 2006 (the "Act"). This authority is crucial to ensure that share allotments are conducted in accordance with legal and governance frameworks.

However several exceptions apply and directors can allot shares if the allotment is:

• made under an employee share scheme (it is essential to review the company’s articles first to confirm there are no specific articles restricting this activity);
• regarding a company in financial difficulty as part of an arrangement or reconstruction;
• in respect of exercising a right to subscribe for or convert securities into shares;
• concerning a sale or transfer of treasury shares; and
• under a previously expired authority if an offer or agreement was made before the expiry and the expired authority allows the allotment to take place in such circumstances.

If no exceptions apply, directors must obtain authority under Sections 550 or 551 of the Act – as explained further below.

Authority to allot under section 550 and section 551 of the Act

Section 550: Private company with one class of shares

Directors of private companies can allot shares without additional authority if the company has only one class of shares with uniform rights – and will continue to have one class of shares following the allotment. However this cannot be relied upon if prohibited in the Company's articles. If prohibited, a special resolution (75% shareholder approval) is needed to amend the articles to remove the exclusion or to obtain the necessary authority under Section 551.

Note that companies incorporated under the UK Companies Act 1985 (or before) will need an ordinary resolution (i.e. the approval of a majority of shareholders) authorising them to allot shares under section 550.

Section 551: Other circumstances for private companies

Private companies will need to obtain authority to allot shares under Section 551 if either:

• the company has or will have (after the new shares are issued) more than one class of shares; or
• the company has one class of shares, but directors are restricted from using Section 550 either due to a provision in the articles or because the company (only in respect of companies incorporated under the Companies Act 1985 or earlier), lacks an ordinary resolution granting them authority to allot shares under section 550.

Authority to allot shares pursuant to section 551 can be granted either: in the Company's articles or via a shareholders' resolution - typically an ordinary resolution.

The terms of a Section 551 authority must include the maximum nominal value of shares to be allotted and the expiration date of the authority, which cannot be more than five years.

An existing Section 551 authority can be renewed, revoked, or varied by an ordinary resolution. Renewal is allowed for up to five years, and it can be revoked or modified any time before expiry.

Statutory Pre-emption rights on allotment

Under Section 561 of the Act, when new shares are issued for cash, existing shareholders must be given the first opportunity to subscribe for them, ensuring they can maintain their proportional ownership in the company. Pre-emption rights can be excluded, disapplied or modified by:

• provisions in the company’s articles,
• a special resolution authorising directors to allot shares without pre-emption rights,
• authorising directors under Section 551 to allot shares as if pre-emption rights don’t apply through a special resolution or a provision in the articles; and
• a special resolution allowing directors to disapply or modify pre-emption rights for specific allotments.
Shareholders can pass a special resolution at a general meeting or through a written resolution if allowed by the articles. Existing shareholders can also waive their rights by signing a waiver letter.

Contractual Pre-emption rights on allotment

Contractual pre-emption rights can be excluded, disapplied, or modified by amending the articles through a special resolution. Alternatively, if permitted by the articles, shareholders may waive or disapply these rights via a special resolution or unanimous consent.

Payment for allotted shares

There are four rules for payment for allotted shares. Firstly, shares must not be allotted at a discount and the full nominal value must be paid by the subscriber. Secondly, different amounts and payment times can be arranged amongst shareholders if the articles allow it. Thirdly, shares allotted along with any premium, can be paid for in money or money’s worth (e.g. goodwill and know-how). Fourthly, a share is considered paid up in cash if the consideration is cash or equivalent. The definition of cash consideration includes: (a) cash (including foreign currency); (b) a cheque received in good faith that the directors do not suspect will not be paid; (c) a release of a liability of the company for a liquidated sum; (d) an undertaking to pay cash at a future date; and (e) any other means giving a right to an entitlement to payment or credit equivalent in cash.

Non-cash consideration for future services or work is acceptable only if structured as a contract to perform services for a specified sum now payable, which is paid through fully-paid shares. However, the company must receive valid consideration for the shares. This arrangement risks violating the rule against allotting shares at a discount as it is difficult to objectively value such service and may breach directors’ fiduciary duties if the services are not worth the assigned value. Directors must ensure that the value of non-cash consideration meets the subscription price and that future services will certainly be provided to avoid risks to the company.

Courts may scrutinise the value assigned to non-cash consideration for shares in situations where:

• the contract may be invalid and subject to being set aside;
• the company may have deliberately overvalued the non-cash consideration to issue shares at a discount;
• shares are issued without any consideration. In such a case the allottee and any subsequent holder must still pay the nominal value of the shares, regardless of what the contract says. The burden of proving that the consideration is illusory or overstated lies with the person asserting it.

Implementing the allotment

When a members’ resolution is needed to grant authority to allot shares or disapply pre-emption rights, directors must either convene a board meeting or, if permitted by the articles, pass a signed written resolution. The board should review and approve the necessary members’ resolutions, authorise the circulation of a written resolution to members and, following or subject to the passing of this resolution, resolve to allot the shares, specifying details such as the number and class of shares, allottees, price, and payment method (cash or other assets). Board minutes must be taken at any board meeting and retained for ten years.

When are shares allotted and issued?

While there is no statutory definition of when a share is issued, common law regards it as issued when the allotment is recorded in the company’s register of members in its statutory books.

Post-allotment steps

Registration requirements include:

• updating the company’s statutory register of members and register of allotments within two months of the allotment. A different process applies if the company uses a central register at UK Companies House;
• updating the Persons of Significant Control (PSC) register if the allotment affects the PSC position. Again, a different process applies if the company uses a central register at UK Companies House; and
• share certificates must be issued to new shareholders within two months of the allotment.

Companies House filing requirements include:

• filing form SH01 (statement of capital) at Companies House within one month of the share allotment;
• filing any ordinary resolution regarding directors’ authority to allot shares and any special resolution on pre-emption rights within 15 days of the resolution;
• submitting a printed copy of the amended articles within 15 days of the resolution; and
• filing the appropriate PSC form (PSC01 to PSC09) if the allotment results in a new entry or change to the PSC register. If the company hasn’t opted for a central PSC register, the relevant form must be submitted within 14 days of the change (section 790VA of the Act).

DWF has the largest venture and growth capital group in the UK with over 85 lawyers in 10 offices, and supports investors and companies across several sectors including financial services, technology, media and telecommunications, life sciences and healthcare and real estate and infrastructure. If you have queries on any of the issues covered in this article please contact one of our experts.

We would like to thank Narissa Pankhania and Tahmina Begum for their contribution to this article.