Company shares: issuing, transferring and cancelling

Understanding Company Shares

Shares represent ownership in a company. Each share typically carries certain rights, which can include:

• Voting rights: The ability to vote on company decisions.
• Dividend rights: The right to receive a share of the company's profits.
• Capital rights: The right to a share of the company's assets if it is wound up.

The company's Articles of Association and any Shareholder Agreement will detail the specific rights attached to different classes of shares.

Issuing New Shares

Issuing new shares, also known as allotting shares, increases a company's total share capital and can dilute the ownership percentage of existing shareholders. This process is common for raising new investment or bringing in new partners.

Here's a typical process:

1. Review Articles of Association: Check your company's Articles for any restrictions or requirements regarding the allotment of new shares, such as pre-emption rights (giving existing shareholders first refusal) or specific director authorities.
2. Board Resolution: The directors must hold a board meeting and pass a resolution to approve the allotment of new shares. This resolution should specify the number and class of shares, the price, and to whom they are being allotted.
3. Shareholder Approval: Directors generally need shareholder authority to allot shares, unless this is already granted in the Articles or by an ordinary resolution. If new share classes are being created, or if pre-emption rights are being waived, a special resolution may be required.
4. Allotment and Share Certificates: Once approved, the shares are allotted. The company must then issue share certificates to the new shareholders within two months of the allotment date. These certificates serve as formal evidence of ownership.
5. Update Statutory Registers: The company's internal Register of Members must be updated to reflect the new shareholders and their holdings. If the new shareholding results in a change to Persons with Significant Control (PSCs), the PSC register must also be updated.
6. File Form SH01 with Companies House: You must file a 'Return of Allotment of Shares' (Form SH01) with Companies House within one month (30 days) of the shares being allotted. This form updates the public record of your company's share capital.

Transferring Existing Shares

Transferring shares involves changing the ownership of existing shares from one person or entity (the transferor) to another (the transferee). This does not change the company's total share capital.

The steps typically include:

1. Review Articles and Shareholder Agreement: Always check your company's Articles of Association and any Shareholder Agreement. These documents may contain restrictions on transfers, such as pre-emption rights, or require director approval.
2. Agree Terms: The transferor and transferee must agree on the terms of the transfer, including the number of shares, class, and the price (or if it's a gift).
3. Complete a Stock Transfer Form (J30): The transferor completes and signs a Stock Transfer Form (Form J30). This document records the details of the transfer.
4. Stamp Duty: Stamp Duty is typically payable by the purchaser (transferee) on share transfers if the consideration (value) exceeds £1,000. The current rate is 0.5% of the consideration, rounded up to the nearest £5. If Stamp Duty is due, the form must be sent to HMRC for stamping within 30 days of signing. Gifts of shares are generally exempt from Stamp Duty.
5. Directors' Approval: The company's directors usually need to approve the transfer, especially if the Articles require it.
6. Update Company Records:

• Register of Members: The company's internal Register of Members must be updated to remove the transferor and add the transferee as the new shareholder.
• Share Certificates: The old share certificate should be cancelled, and a new one issued to the transferee, usually within two months of the transfer.
• PSC Register: If the transfer changes who has significant control over the company (e.g., someone now holds 25% or more of shares/voting rights), the PSC register must be updated.

1. Companies House Filing: While the Stock Transfer Form itself is not filed with Companies House, the changes in share ownership will be reflected in your next Confirmation Statement (CS01). If there's a change to a Person with Significant Control (PSC), a specific PSC form (e.g., PSC01) must be filed with Companies House within 28 days.

Cancelling Shares (Reduction of Share Capital)

Cancelling shares reduces a company's issued share capital. This is often done after a share buyback or as part of a restructuring.

There are generally two main methods for a private company to reduce its share capital:

1. By Court Order: This is a more complex and less common method for small businesses.
2. By Solvency Statement: This is typically used by private companies and involves:

• Board Resolution: Directors pass a resolution to approve the share cancellation.
• Solvency Statement: The directors must sign a solvency statement, confirming that the company will be able to pay its debts for the next 12 months.
• Special Resolution: Shareholders must pass a special resolution (requiring 75% majority) approving the reduction of capital.
• Filing with Companies House:
• Form SH03 (Return of Purchase of Own Shares): If the cancellation follows a share buyback, this form must be filed within 28 days of the purchase. If the consideration for the buyback exceeds £1,000, it must first be stamped by HMRC for Stamp Duty.
• Form SH06 (Notice of Cancellation of Shares): This form is used to notify Companies House of the cancellation of shares, typically after a buyback or capital reduction. It must be filed within 28 days of the cancellation and includes an updated statement of capital.
• A copy of the special resolution and the solvency statement must also be filed with Companies House.

Persons with Significant Control (PSCs)

The PSC register identifies individuals or entities that own or control a company. This is a crucial aspect of transparency and compliance.

A PSC is generally someone who meets one or more of these conditions:

• Holds more than 25% of the shares.
• Holds more than 25% of the voting rights.
• Has the right to appoint or remove the majority of the board of directors.
• Has the right to exercise, or actually exercises, significant influence or control over the company.

You must:

• Maintain an internal PSC register: Keep this register accurate and up to date with the required details of your PSCs.
• Notify Companies House: Report any changes to your PSC information to Companies House within 14 days. This is done using specific PSC forms (e.g., PSC01 for a new PSC, PSC07 for ceasing to be a PSC).

Common mistakes

• Not updating internal registers: Failing to keep the Register of Members and PSC register accurate and current. These are legal requirements.
• Ignoring Articles of Association and Shareholder Agreements: Proceeding with share changes without checking these crucial documents can lead to disputes or invalid transactions.
• Missing Companies House filing deadlines: Late filing of forms like SH01, SH03, SH06, or PSC forms can result in penalties for the company and its directors.
• Incorrect Stamp Duty: Not paying Stamp Duty when required, or paying the wrong amount, can invalidate a share transfer until corrected.
• Not issuing share certificates: Failing to issue new share certificates within the statutory timeframe after allotment or transfer.