Directors' power to issue shares

A company is formed with the number of shares stated in the application Form IN01. The number of shares bought by each initial shareholder is stated in that form. Subsequently, the directors might want to issue more shares to the same shareholders or to other people.

Directors of a private company with just one class of shares (formed under the current Companies Act 2006) have the power to issue shares without any additional authority, as long as the company's articles don't forbid them from doing so.

Also, directors don't need authority to issue shares in an employees' share scheme unless the articles of association (a company's set of rules) say otherwise.

In private companies with more than one class of share and public companies, the directors need authority to issue shares. This authority can either be given in the articles or by an ordinary resolution of the shareholders.

Formalities required when shares are issued

Within 2 months of the company issuing (also referred to as 'allotting') shares, the company must:

• send the shareholder a share certificate; and
• enter the shareholder in the register of members kept at the company's registered office. Companies may elect to keep information in relation to the shareholders on a central register at Companies House, instead of keeping a register at the company's registered office. All the members of the company must agree to this. The central register must be updated as soon as changes are made. The old register must still be kept at the registered office but would no longer need to be updated.

Within one month of issuing the shares, the company must deliver a return on Form SH01 (Return of allotment accompanied by statement of capital) to Companies House. This return must state the number of shares allotted, and the amount paid and unpaid on the shares.

Issue at a premium

The nominal value of the shares is their face value. This value is stated in the original Form IN01 when the company is registered ('incorporated'). However, the market value of the company might be higher than its stated nominal share capital. The company would then be able to issue new shares at a price higher than the nominal value of the shares, i.e. at a premium. So if the company issues a further 1,000 shares with a nominal value of £1 each, it could require the people paying for these new shares to pay £1.50 for each share. The share premium would be £0.50 per share. The nominal value paid for the shares is recorded in the share capital account. The amount paid above the nominal value of shares has to be recorded in a separate account called the share premium account. Shares can't be issued at a discount, i.e. for less than their face value.

Issuing redeemable shares

Redeemable shares are shares that can be bought back from the shareholder by the company. The directors can only issue redeemable shares if the company has already issued other, ordinary non-redeemable shares.

Private companies can issue redeemable shares as long as their articles don't forbid this. The standard default ('model') articles for a private company limited by shares give the directors authority to issue redeemable shares, and to determine the terms and conditions of the shares and how they're redeemed. If the articles don't give this authority, the shareholders could either change them or pass an ordinary resolution giving the directors the authority to issue redeemable shares and determine these terms and conditions. The directors must then state what these terms and conditions are before issuing the shares. The articles could also be changed to set out the terms and conditions.

Redeemable shares can only be redeemed if they've been fully paid for. Private companies can redeem shares by paying for them out of profits that would otherwise have been distributed as dividends. Private companies can also pay for redeemable shares out of the share capital if certain conditions are fulfilled and the procedure set out in the Companies Act 2006 is followed. This is an exception to the principle of maintenance of capital (see Share capital for more information).

If shares are redeemed, they're cancelled and the issued share capital is reduced by the value of the cancelled shares.