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Companies Act 2006 - The Final Countdown
Share capital provisions for private companies in force from 1 October 2009
September 2009
Summary
This article, which is the third in our three-part series, outlines some of the more important changes to the share capital regime affecting private companies limited by shares which are coming into force from 1 October 2009. These include:
- the abolition of the requirement to have an authorised share capital;
- pthe ability to give directors an unlimited authority to allot shares;
- de-regulatory measures in terms of capital maintenance;
- changes to the process for the redenomination of share capital;
- changes to the process for varying class rights; and
- new obligations to file a statement of capital.
These changes, together with recommendations as to how a private company can take advantage of them, are considered in more detail below.
Abolition of authorised share capital
From 1 October 2009, a company will no longer be required to have an authorised share capital. However, existing companies (i.e., companies incorporated prior to 1 October 2009) will have a statement about their authorised share capital in their memorandum and that statement will act as a ceiling on the number of shares that the company can allot. Companies may amend or revoke this restriction by ordinary resolution, or by adopting new articles which do not contain such a restriction (by special resolution). For companies incorporated on or after 1 October 2009, shareholders who wish to restrict the number of shares that the company can allot may do so by including a restriction in the company’s articles.
Recommended action:
- Companies formed under the Companies Act 2006 (the “Act”) on or after 1 October 2009 do not need to do anything, unless they wish to put a ceiling on the number of shares that can be allotted.
- Companies formed prior to 1 October 2009 should consider either (i) passing a resolution to revoke any restriction as to authorised capital or (ii) adopting new articles which do not contain such restrictions.
Authority to allot shares
The Act largely restates the 1985 Act provisions on the allotment of shares with one major change concerning private companies with only one class of share capital. For these companies, if they are formed under the Act on or after 1 October 2009, the directors will no longer require an authority to allot shares of that class, unless the articles of association so require. If they are formed prior to 1 October 2009, the directors no longer need authority to allot shares if an ordinary resolution to this effect is passed (even where an authority to allot is built into its articles with the result that the resolution would effectively amend the articles).
A private company with more than one class of shares which has, prior to 1 October 2009, elected to grant its directors indefinite authority to allot shares (under section 80A of the 1985 Act), will probably be worse off under the Act. This is because from 1 October 2009 a company’s section 80 or section 80A authority is to have effect as if given under the Act. The Act provides that any authority to allot must be for a period of 5 years or less (for companies with more than one class of shares). In all probability, a pre-existing section 80A authority/election for more than 5 years will be considered valid, and will be regarded as an authority expiring 5 years from the date it was granted.
Recommended action:
- Private companies with only one class of share capital and formed under the Act on or after 1 October 2009 do not need to do anything.
- Private companies with only one class of share capital and formed prior to 1 October 2009 should consider passing an ordinary resolution to dispense with the requirement to seek authority to allot.
- All other companies should review their existing authorities to allot.
- Any private company with more than one class of shares which had taken advantage of section 80A to grant its directors an authority to allot for more than 5 years should, to ensure legal certainty, consider granting directors an authority to allot for 5 years or less.
Pre-emption rights
The 1985 Act provisions on pre-emption rights (including how they are disapplied) are broadly the same under the Act but with the following exceptions:
- The minimum period for communicating acceptances of pre-emption offers by members is shortened from 21 to 14 days.
- A private company with only one class of shares will be able to disapply pre-emption rights (generally) by including a power in its articles, or by special resolution.
Recommended action:
Going forward, private companies with only one class of share capital should consider whether to use the simplified procedure (i.e., by special resolution) for disapplying pre-emption rights indefinitely.
Capital maintenance
From 1 October 2009 a company will be able to reduce its share capital, purchase its own shares, allot redeemable shares, redeem such shares (including out of capital) and alter its share capital, even where its articles do not specifically contain the relevant authority (so long as there is nothing prohibiting the relevant action in its articles). Following any such event, the company will be required to file a statement of capital (see below).
In addition:
- If authorised by the articles or by an ordinary resolution, when issuing redeemable shares, the directors may specify the terms, conditions and manner of redemption of the shares.
- Where a company is redeeming shares, the terms of redemption may provide that payment of the amount payable on redemption may, by agreement between the company and the holder of the redeemable shares, be deferred.
- The share buy back procedure is to be somewhat relaxed from 1 October 2009 so that instead of requiring directors to make a statutory declaration, directors will instead be required to give a “directors' statement”.
Recommended action:
No action is required. However, we note the following:
- Any company adopting or amending its articles after 1 October 2009 should be aware that silence in the articles on capital maintenance issues will usually be construed as authority (e.g. to reduce capital, purchase the company’s shares, issue redeemable shares and alter share capital).
- Where any company wishes to empower its directors to determine the terms, conditions and manner of redemption of any redeemable shares to be issued, its articles should be amended, or else a resolution should be passed to that effect.
Redenomination of share capital
Under the 1985 Act, companies wishing to redenominate their share capital may do so only by cancelling (or buying back) the relevant shares and then issuing them in another currency. From 1 October 2009, companies will be able to redenominate the currency of their shares by ordinary resolution. The spot rate of exchange to be used when converting share capital from one currency to another must be specified in the resolution. The Act also introduces a procedure allowing any company which is redenominating its capital to cancel up to 10% of the redenominated capital after such cancellation by special resolution (i.e., without prior approval of the courts) for the purpose of rounding share values to a “more suitable” nominal amount.
Alteration of share capital
From 1 October 2009, a company will no longer require authority in its articles to increase, reduce, sub-divide or consolidate its share capital or to reconvert stocks into shares.
Variation of class rights
From 1 October 2009, a company’s articles of association will be able to specify less stringent procedures for varying class rights than the default statutory procedures (for example, they could specify a simple majority vote at a class meeting). Shareholders holding up to 15% of the capital in a company (and who did not consent to the variation) will still have the right to object to any variation of their rights (including any amendment to the procedure for varying class rights).
Recommended action:
Companies with more than one class of share capital should consider what, if any, changes they would like to make to the procedures in their articles for varying class rights.
Statement of capital
One of the major changes to the share capital regime under the Act is the introduction of a requirement for companies to produce “statements of capital”. These comprehensive snapshots of a company’s share capital at a given moment in time must be included in annual returns and upon the occurrence of almost any alteration to a company’s share capital, e.g. any change affecting the total number of shares allotted, the aggregate nominal value of shares, the amount (if any) unpaid on those shares, etc.
The requirement to produce statements of capital will impose an additional administrative burden on any person tasked with performing a company secretarial function (especially when preparing the first statement of capital). However, the requirement for a company to produce a statement of capital will have real benefits for third parties undertaking due diligence on a company, who under the previous regime were left shouldering the burden of trying to determining a company’s share capital situation on the basis of filings at Companies House.
Recommended action:
Company officers should check that they are familiar with the relevant details of their companies’ capital and should keep a draft statement of capital to hand for use when filings are required.
If you have any questions or would like to discuss anything in this article in more detail, please contact Charles Claisse at Kemp Little LLP on 020 7600 8080.
Kemp Little LLP Solicitors, Cheapside House, 138 Cheapside, London, EC2V 6BJ
Tel: +44 (0) 20 7600 8080 Fax: +44 (0) 20 7600 7878
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