Authorised Capital / Issue of Shares / Allotment Letter

A. Allotment Letter and Issue of Shares

Allotment letter and issue of shares concern the creation of new shares, not the transfer of existing shares. For information on the transfer of existing shares, please refer to the section on “Transfer of Shares”.

Shares are allotted when a person acquires the unconditional right to be included in a company's register of members' respect for them. On this basis, an allotment of options or convertible bonds, for example, is not an allotment of the underlying shares.

Shares can be issued after being allotted. Generally, shares are taken to be issued when:

(a) they have been allotted; and

(b) they have been registered in the company's register of members in the name of the allottee or its nominee.

The distinction between allotment and the issue of shares can be important for a number of reasons. For example, the obligation to create a share premium account and the disclosure obligation upon the issue of shares.

B. Checklist for Allotment Letter and Issue of Shares

Before shares are allotted or issued, or rights are granted (for example, by the allotment of convertible securities) which will lead to the allotment or issue of shares, the following points must be checked.

1. Does the company have sufficient authorized capital but unissued share capital already available for the issue?

The company may not issue shares in excess of the figure which has been set as its authorised capital. One will therefore need to ascertain: (a) the current level of the company's authorised capital; and (b) how much of that is already in issue. If the remaining authorised capital is insufficient, the company may need a shareholder resolution to increase its authorised capital.

2. Do the directors have the authority to make the allotments proposed?

One should check the provisions of the Companies Law, the memorandum and articles of association of the company, and any directions given by special resolution, for the directors to exercise the power of allotment of a company. Generally, directors have the power to allot and issue shares, although not the power to attach special rights or restrictions to them.

3.  Are there any pre-emptive rights over the shares?

Pre-emption rights are rights for the existing shareholders to subscribe to the shares first on the basis of equal price and terms. There are no common law pre-emption rights. Companies may, however, be bound by pre-emption provisions in the articles of association or a shareholders' agreement which affect their ability to issue new shares. Therefore, one should check whether the existing shareholders have the right to receive offers of new securities on a pro-rata basis before they are allotted to third parties.

4. Are there local laws about the amount and forms of consideration?

In some jurisdictions, shares may not be issued at a price lower than their nominal value, or, where there is no nominal value, their accountable par. In addition, some jurisdictions also required shares to be issued in exchange for cash only. One will need to check the relevant local laws prior to the issue.

5. Is the company listed on any stock exchange?

If so, the relevant Listing Rules should also be considered.

C. Share Capital

1. Issue of Share Capital

The general rule is that the nominal amount of and any premium on a share allotted by a company, whether public or private, may be paid up in money or money's worth. Money's worth specifically includes goodwill and know-how. However, this does not preclude the issue of bonus shares.

Shares must be given a fixed nominal, or par, value; but, as a company's shares can have a greater market value than their nominal amount, the company may (but is not obliged to, subject to directors' fiduciary duty considerations) require applicants for new shares to pay a premium in addition to the nominal value of the shares applied for. A public company (and a company that has passed a resolution to become one) is subject to special constraints on its ability to accept non-cash consideration for its shares:

• cash (including foreign currency) received by the company; or
• a cheque received by the company in good faith which the directors have no reason for suspecting will not be paid; or
• a release of liability of the company for a liquidated sum; or
• an undertaking to pay cash to the company at a future date.
  

2. Return of Share Capital

There are three main ways of returning cash/capital to shareholders:

Dividend - a simple payment in cash to all shareholders of an amount per share pursuant to a board resolution declaring the dividend. 

Share buy back - the repurchase by a listed company of its shares through the market for cash, typically pursuant to the authority obtained at each annual general meeting. This authority is usually limited to 15 to 20% of the issued share capital and restricts the price that can be paid to not more than a 5% premium on the market price. 

Reduction of capital - a cancellation of issued share capital in consideration for the payment of a cash sum to shareholders. Can be achieved by cancelling part of the nominal value of each share or a proportion of each member's shareholding. Cash is returned pro-rata to shareholders. The reduction of capital method requires court sanction.