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Allotment of shares: considerations and potential pitfalls

It is common for accountants to cross over into legal work for changes to a private limited company’s issued share capital. Kerry Southworth, assistant solicitor at Harrison Drury, identifies the key points to consider, and explains the quirks that often come up

A company may allot shares for a number of reasons, including to raise further investment, incentivising employees through EMI options, or as consideration in corporate restructures.

The process for an allotment can vary considerably depending on the circumstance surrounding the allotment, as well as the current and future share structure of the company.

The Companies Act 2006 largely drives how an allotment is carried out, with two specific sections requiring consideration in each situation. Firstly, the company needs the authority to allot shares under Section 551. This authority may have already been granted (by a resolution or in the company’s articles) or there may be an exclusion to the requirement for this authority (if the company was incorporated after 2009 and has and will continue to have one class of members). If authority has not already been granted and there are no exclusions, the company’s members will need to resolve to authorise the allotment.

Secondly, the company may be required to give its existing members the right of first refusal in relation to such allotment. This anti-dilution mechanism is set out in Section 561, and applies to all allotments except where the right is exempted (such as an allotment under an employee share scheme), excluded by the company’s articles of association, or where the members have otherwise waived this right. 

Transfer of Shares

The process of transferring shares is often an overlooked step in the context of a wider matter, such as a sale of a company or a company reorganisation. Here, it is common for solicitors to be instructed on the wider matter, and accordingly the solicitors also attend to the transfer of shares. However, where shares are transferred between family members, or into existing trusts, accountants often opt to deal with the transfers without legal assistance.

There are a number of issues to consider when contemplating a transfer of shares in a company. These include whether any members have pre-emption rights, which, similar to a pre-emption on an allotment of shares, give those members a right of first refusal over the shares to be transferred. A pre-emption right in this context would often be found either in the company’s articles of association or in a shareholders’ agreement between the members. 

In addition to this, since the Small Business, Enterprise and Employment Act 2015 came into force, a company must maintain a register of its persons with significant control (PSC). Shares transferred between family members can often be a substantial portion of the whole company, and there may be PSC changes to deal with here, both to the company’s statutory register, but also to its public register at Companies House.

Board Meetings

Company directors are ultimately responsible for ensuring that changes to a company’s share capital are properly executed. It is therefore typical that when processing these changes, a meeting of the directors of the company is held to set out and decide on the legal process. When a meeting is required, the first step would be to review the company’s articles of association and any shareholders’ agreement, which will likely contain provisions detailing the practicalities of holding a board meeting, including who can attend and vote. 

If a director has an interest in a matter to be decided at the meeting (for example where he is a member and the matter concerns an allotment of further shares), that director may be barred from voting in the meeting, due to this interest. With smaller companies, where the directors and members are often the same people, this can be problematic.
think ahead

The issues mentioned in this article are only a snapshot of the matters to be considered when changing a company’s share capital. Each company and circumstance triggering a change can be very different; however, it is tempting to rely on the processes of a previous but similar matter. Despite this, starting from the beginning and working through the whole legal process (including reviewing the relevant statutory rules and provisions in the articles of association as well as any shareholders’ agreement) will inevitably lead to a better outcome for all involved.

It is vital that those undertaking the drafting and providing the advice on these matters are comfortable with the various legal complexities involved, as there are significant personal risks for company directors, as well as professional risks for advisors, should the proper processes not be followed. 

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