PART 18: ALLOTMENT OF SHARES

837.     This Part of the Bill deals with various matters relating to the allotment of shares. It is largely drafted as free-standing clauses which replace corresponding provisions in the 1985 Act.

Power of directors to allot shares

838.     Generally speaking, the directors of a company may currently only allot shares (or grant rights to subscribe for shares or to convert any security into shares) if they are authorised to do so by ordinary resolution of the company's members or by the articles of association.

839.     Such an authority may be general (that is, it may give the directors a general authority to allot shares) or specific (that is, it may, for example, be restricted to a specified allotment, an allotment of shares up to a specified value, or an allotment of shares of a particular class). In either case, the authority must state the "maximum amount of relevant securities that may be allotted under it" and the date when the authority will expire, (which must not be more than 5 years from the date on which the authority is given). The authority may be renewed for further periods not exceeding 5 years.

840.     There is a relaxation for private companies from the requirement to state the date on which the authority will expire and so such companies may, by elective resolution under section 379A of the 1985 Act, give such authority either for an indefinite period or a fixed period of the company's choice.

841.     The Bill removes for private companies the requirement for prior authorisation in certain circumstances (described in clause 541: Power of directors to allot shares etc: private company with only one class of shares). It also abolishes the concept of

authorised share capital and a company's constitution will therefore no longer have to contain a ceiling on the number of shares that the directors are authorised to allot.

Clause 540: Exercise by directors of power to allot shares etc

842.     This clause replaces section 80(1), (2), (9) and (10) of the 1985 Act. It provides that the directors may not allot shares (or grant rights to subscribe for shares or to convert any security into shares) except in accordance with one of the following two clauses.

843.     Subsection (2) of this clause provides that directors may allot shares in pursuance of an employees' share scheme without having to comply with one of the following two clauses. This mirrors the current position (see section 80(2) of the 1985 Act).

844.     Similarly, where a right to subscribe for, or to convert any security into, shares already exists, then the directors may allot shares pursuant to that right without having to comply with one of the following two clauses (see subsection 3).

845.     A director who knowingly and wilfully allots shares in contravention of the requirements imposed by this clause commits an offence. Such an allotment is not, however, invalid.

Clause 541: Power of directors to allot shares etc: private company with only one class of shares

846.     In line with the recommendations of the CLR (Final Report, paragraph 4.5), this clause empowers the directors to allot shares (or to grant rights to subscribe for or convert any security into shares) where the company is a private company which will have only one class of shares after the proposed allotment and removes the current requirement (contained in section 80 of the 1985 Act) for the directors to have prior authority from the company's members for such an allotment of shares. In addition, it provides that the members may, if they wish, restrict or prohibit this power through the articles of association. The definition of "classes of shares" is contained in clause 808 (Classes of shares).

Clause 542: Power of directors to allot shares etc: authorisation by company

847.     This clause replaces section 80(3) to (8) of the 1985 Act and applies both to private companies which will have more than one class of shares after a proposed allotment and to public companies. It provides that the directors may only allot shares (or grant rights to subscribe for shares or to convert any security into shares) if they have been given prior authorisation for the proposed allotment by ordinary resolution of the company's members or by the articles of association.

848.     Subsections (2) to (5) set out details of the way in which prior authorisation (or a renewal of such authorisation) may be given and, in particular, provides that the authority may not be given for a period of more than 5 years. An authority given to the directors under this clause, and any resolution of the company renewing such an authority, must state "the maximum amount of shares" to be allotted pursuant to the authority. This mirrors the formulation of words used in section 80 of the 1985 Act and enables the members to limit the authority to a specific number of shares or shares up to a given maximum nominal value.

849.     Subsection (8) makes it clear that an ordinary resolution of the company's members will suffice for the purposes of giving authority to the directors, even where the effect of the resolution is to alter the company's articles of association (which would normally require a special resolution of the company's members).

Public companies: allotment where issue not fully subscribed

Clause 543: Public companies: allotment where issue not fully subscribed

850.     The provisions of this clause relate to the allotment of shares by public companies, and apply where not all the shares offered are taken up. A public company must not allot shares following an offer to subscribe for shares unless all the shares offered are taken up or the offer is made on the basis that it will go ahead even if all the shares offered are not taken up or if other conditions specified in the offer are met. It is not possible for the terms of the offer to override the requirements of this clause (subsection (5)).

851.     The purpose of this rule is to protect persons who apply for shares, by ensuring that if the increase in capital is not fully subscribed, the capital will be increased by the amount of the subscriptions received only if the conditions of the issue so provide (Article 28 of the Second Company Law Directive (77/91/EEC)).

852.     If 40 days after first making the offer, the offer is unsuccessful because not enough shares have been applied for under the offer, any money or other consideration received from those that did apply for shares under the offer must be repaid or returned (subsection (2)). Interest becomes payable after the expiration of the 48th day after the offer was first made (subsection (3)). The rate of interest will be as specified at the time under section 17 of the Judgments Act 1838 (currently 8%). This is a change from section 84 of the 1985 Act (which this clause replaces) which sets the interest rate at 5% per annum.

853.     The 40 day and 48 day time limits imposed by subsections (2) and (3) now run from the making of the offer rather than from the issue of any prospectus (as was the case under section 84 of the 1985 Act) given that the requirement or otherwise for a prospectus is a matter of securities law.

854.     The regulation of public offers, especially requirements relating to prospectuses, is generally a matter of securities law. Sections 82 and 83 of the 1985 Act are, therefore, repealed.

Clause 544: Effect of allotment in contravention of section 543

855.     This clause sets out the consequences where a company goes ahead with an allotment of shares in contravention of clause 543 (Public companies: allotment where issue not fully subscribed). Subsection (1) gives anyone who subscribed for the shares a right to avoid the allotment, provided that notice of the avoidance is given within one month of the date of allotment. As under section 85 of the 1985 Act (which this clause replaces) any director who knowingly permits or authorises the breach is liable to pay compensation to the company and to the person receiving the shares for any losses resulting from the breach (subsection (3)).

Return of allotments

Clause 545: Return of allotment by limited company

856.     This clause replaces section 88 of the 1985 Act. As now, within one month of an allotment of new shares in a limited company, the company is required to make a return of allotments to the registrar. This return must contain "prescribed information" relating to the allotment.

857.     A return of allotments made under this clause must be accompanied by a statement of capital. A statement of capital is in essence a "snapshot" of a company's total subscribed capital at a particular point in time (in this context, the date to which the return of allotments is made up).

858.     The requirement for a statement of capital when an allotment of new shares is made is new. It is based on a recommendation by the CLR (Final Report, paragraph 7.30) and for public companies, this implements a requirement in the Second Company Law Directive (77/91/EEC) which states:

"the statutes or instruments of incorporation of the company shall always give at least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..".

"Statutes" and "instruments of incorporation" equate to the articles of association and memorandum and the need to disclose information pertaining to the aggregate of a company's subscribed capital flows from the abolition of the requirement for a company to have an authorised share capital.

859.     Whilst this Directive only applies to public companies, the requirement to provide a statement of capital, here and elsewhere in the Bill, has been extended to private companies limited by shares. This will mean that the public register will contain up-to-date information on a company's share capital (the requirement for a statement of capital supplements existing provisions which require a company to give notice to the registrar when it amends its share capital in any way).

860.     The information which will in future be set out in the statement of capital includes prescribed particulars of the rights attached to each class of shares. Such information is currently required to be filed under either section 123 of the 1985 Act (which relates to increases in authorised share capital) which is repealed by the Bill or section 128(1) and (2) of that Act (which relates to allotments of a new class of shares) which will be repealed as a consequential amendment.

861.     Currently, if shares are allotted as fully or partly paid up otherwise than in cash, the company must deliver the contract that it has with the allottee (or details of this contract if it is not in writing) to the registrar. Such a contract may contain commercially sensitive information which the company would not normally want to disclose. This clause does not reproduce this requirement. It should be noted, however, that the Secretary of State has the power to prescribe the information which must be included in the return of allotments, and such information may include details of any consideration received in respect of shares which are allotted as fully or partly paid up otherwise than in cash.

Clause 546: Return of allotment of new class of shares by unlimited company

862.     This provision requires unlimited companies to make a return of allotments to the registrar where the directors allot a new class of shares. This reflects the current law (section 128(1) and (2) of the 1985 Act).

Clause 547: Offence of failure to make return

863.     This clause replaces sections 88(5) and (insofar as it relates to a requirement for an unlimited company to register particulars of an allotment of a new class of shares) 128(5) of the 1985 Act. Where a company fails to comply with the requirements to make a return of allotments to the registrar, every officer of the company who is in default commits an offence.

864.     As now under section 88(5), where there is a default in making a return of allotments within the specified time (one month after the allotment) a person who is liable for the default may apply to the court for relief (see subsection (3)).

Time for accepting pre-emption offer

Clause 548: Time for acceptance of pre-emption offers

865.     Subject to some exceptions, under section 89(1) of the 1985 Act, a company that is proposing to allot equity securities (defined in section 94(2) of the 1985 Act - which is retained by the Bill) must offer them to existing shareholders first (that is, on a pre-emptive basis). The basic principle (which is unchanged by the Bill) is that a shareholder should be able to protect his proportion of the total equity of a company by having the opportunity to subscribe for any new issue of equity securities. Section 90(6) of that Act provides that the offer to shareholders must state a period of not less than 21 days during which it may be accepted and it may not be withdrawn before the end of that period.

866.     This clause gives the Secretary of State the power to vary the period of 21 days (but not so as to reduce it to fewer than 14 days).

Disapplication of pre-emption rights

867.     The following group of clauses deal with the circumstances in which the directors of a company may disapply or modify the operation of the statutory pre-emption requirements in section 89(1) of the 1985 Act. They will be entitled to do so only if they are given power by the articles or by special resolution in accordance with the detailed rules in these clauses. The rules replace equivalent provisions in section 95 of that Act.

Clause 549: Disapplication of pre-emption rights: private company with only one class of shares

868.     This clause sets out how members of a private company with only one class of shares may authorise the directors to allot shares without complying with the statutory pre-emption provisions.

Clause 550: Disapplication of pre-emption rights: directors acting under general authorisation

869.     This clause sets out ways in which members may give the directors power to allot shares without complying with the statutory pre-emption provisions. It applies where the directors are generally authorised to allot shares for the purposes of clause 542 (Power of directors to allot shares etc: authorisation by company).

Clause 551: Disapplication of pre-emption rights by special resolution

870.     This clause also sets out a way in which members of a company may give the directors power to allot shares without complying with the statutory pre-emption provisions. If members authorise directors under this clause they are able to exercise control over the way in which or the occasions on which the power can be exercised. It applies where the directors are authorised (whether generally or otherwise) for the purpose of clause 542 (Power of directors to allot shares etc: authorisation by company).

871.     The members may only pass a special resolution to disapply pre-emption rights under this clause if the directors have made a recommendation that this power should be given to them (subsections (5) to (7)). The directors must set out (in writing) their reasons for making such a recommendation and provide details of the amount payable in respect of the proposed allotment (which must be justified by the directors). A copy of the directors' statement must be circulated to every member who is entitled to vote on the proposed resolution in sufficient time for him to consider it before he exercises his right to vote. These rules are carried forward from section 95(2) of the 1985 Act.

Clause 552: Liability for false statement in directors' statement

872.     This clause reproduces the effect of section 95(6) of the 1985 Act. Where material contained in a statement to the members of a company under subsection (7) of clause 551 (Disapplication of pre-emption rights by special resolution) is misleading, false or deceptive in a material particular, any person who knowingly or recklessly authorised or permitted the inclusion of that material commits an offence (see subsection (2)).

Clause 553: Disapplication of pre-emption rights: sale of treasury shares

873.     Where a company buys back its own shares, it is normally required to cancel those shares (see section 160(4) of the 1985 Act as applied to purchases of own shares by section 162(2)). Certain companies (principally those which are listed or those which are traded on the Alternative Investment Market and equivalent companies in the EEA) may elect not to cancel shares which have been bought back but may hold the shares "in treasury". A share which is held in treasury may be sold at a future point in time and this facility enables such companies to raise capital more quickly than they would otherwise be able to do so, as the directors do not have to obtain prior authority from the company's members before selling treasury shares. However, the provisions of section 89 of the 1985 Act (offers to shareholders to be on pre-emptive basis) do apply to sales of treasury shares as they apply to allotments of shares (see section 94(3A)).

874.     This clause applies to a sale of shares which have been held in treasury by the company. It reproduces the effect of section 95(2A) of the 1985 Act. It enables the company's members to give a general power to the directors (through the company's articles or by special resolution of the company's members) to sell such shares as if section 89(1) of that Act did not apply, or applied with modifications.

875.     This clause also permits the members to confer upon the directors (by special resolution) a specific power which enables them to allot equity securities under this clause as if section 89(1) of the 1985 Act did not apply to a specified allotment, or applied with modifications.

Commissions, discounts and allowances

Clause 554: Commissions, discounts and allowances

876.     This clause applies to all companies that pay commission in connection with the subscription of shares in the company. The payment of any commission must be authorised in the company's articles, must not exceed the amount authorised by the articles and must not exceed 10% of the share issue price. The purpose of the clause is to prohibit the payment of large commissions amounting to the issue of shares at a discount. As in sections 97 and 98 of the 1985 Act (which this clause replaces) the payment of brokerage (commission to stockbrokers, bankers and the like) continues to be lawful to the extent that it has previously been allowed.

877.     This clause does not retain the provisions of section 97(2)(b), (3) and (4) of the 1985 Act as the contents of prospectuses is a matter for Prospectus Rules made under Part 6 of the FSMA 2000.

Provisions not applicable to shares taken on formation

Clause 555: Provisions not applicable to shares taken on formation

878.     Taken together with subsection (5) of clause 16 (Effect of registration) and clause 556 (Companies having a share capital), this clause makes it clear that the subscribers to the memorandum become the holders of the shares that are taken by them on formation and that the Bill provisions on share allotments subsequent to registration, including the requirement for a return of allotments, and the Bill provisions on pre-emption rights do not apply to the shares taken by the subscribers.

PART 19: SHARE CAPITAL

Share capital and how it may be altered

879.     The initial clauses in this Part are about the fundamentals of share capital and will be of general relevance to all limited companies having a share capital. They are drafted as freestanding clauses in the Bill which replace equivalent provisions in the 1985 Act.

Clause 556: Companies having a share capital

880.     Although the subscribers to the memorandum (see clause 8: Memorandum of association) become the holders of the shares taken by them on the registration of a company (see clause 16: Effect of registration) and also become members of the company on its registration (see clause 111: The members of a company), those shares are not allotted to them and the rules on returns of allotments and pre-emption rights do not apply in relation to them (see clause 555: Provisions not applicable to shares taken on formation). However, this clause makes it clear that references in the Companies Acts to issued or allotted shares include the shares taken by the subscribers to the memorandum.

Clause 557: Shares of limited companies to have fixed nominal value

881.     Currently, section 2(5)(a) of the 1985 Act (requirements with respect to memorandum) requires that, in the case of a company having a share capital, the memorandum of a limited company must state the amount of the share capital with which the company proposes to be registered and the division of that share capital into shares of a fixed amount. This capital figure as stated in the memorandum (known as the "authorised share capital") acts as a ceiling on the amount of shares that a company may issue. Such authorised share capital may, however, be increased by ordinary resolution under section 121 of that Act. The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (see Final Report, paragraph 10.6) and so this provision of the 1985 Act will be repealed.

882.     This clause is required as a consequence of this repeal. It does two key things:

• it makes it clear that the shares in a limited company having a share capital must have a fixed nominal value, e.g. 1p, £1, $1 or 1 euro and therefore prevents a company from issuing shares of no par value (thereby implementing for public companies, Article 8 of the Second Company Law Directive (77/91/EEC)); and

• it places in statute the common law rules that shares may be denominated in any currency and that different classes of shares may be denominated in different currencies.

883.     Where a company purports to allot shares without a fixed nominal value, every officer of the company who is in default commits an offence and is liable to a fine (see subsections (4) and (5)). Moreover, such a purported allotment is void (see subsection (2)).

884.     This clause needs to be read alongside clause 9 (Registration documents), which requires the application for registration of a company that is to be formed with a share capital to include a "statement of capital and initial shareholdings". The contents of this statement are prescribed in clause 10 (Statement of capital and initial shareholdings) and this includes a requirement to set out the total number of shares and the aggregate nominal value of the shares which are to be taken by the subscribers to the memorandum on formation.

Clause 558: Alteration of share capital of limited company

885.     This clause prohibits a limited company from altering its share capital except in the ways permitted under the Bill and under those provisions in the 1985 Act relating to alterations to a company's share capital that are retained. This includes a pointer to a new provision which will enable companies limited by shares easily to convert (or "redenominate") their share capital from one currency to another (see clause 586: Redenomination of share capital).

Clause 559: Sub-division or consolidation of shares

886.     This clause replaces section 121(2)(b) and (d) of the 1985 Act. It sets out the circumstances and manner in which a limited company may consolidate or sub-divide its share capital.

887.     Consolidation of a company's share capital involves combining a number of shares into a new share of commensurate nominal value: for example, ten £1 shares may be combined to make one £10 share. Sub-division of a company's share capital involves dividing a share into a number of new shares with a smaller nominal value: for example, a £10 share may be sub-divided into ten £1 shares.

888.     Where shares in a company are sub-divided or consolidated, the proportion between the amount paid and the amount unpaid (if any) on the original share(s) must remain the same in relation to the share(s) resulting from the sub-division or

consolidation. If, for example, £2 is unpaid on a £10 share that is subsequently sub-divided into ten £1 shares, there will now be 20p unpaid on each of those ten shares.

889.     A company may exercise a power conferred on it under this clause only if the members have passed an ordinary resolution authorising it to do so. Such a resolution may authorise a company to exercise more than one of the powers conferred on it under this clause, for example, the resolution may authorise a sub-division of one class of the company's shares and a consolidation of another. It may also authorise the company to exercise a power conferred on it under this clause on more than one occasion or at a specified time or in specified circumstances. This avoids the directors having to obtain authorisation from the company's members on each and every occasion that a company alters its share capital under this clause (which may be inconvenient to the directors and members alike or impractical due to timing constraints).

890.     The flexibility to pass a conditional resolution (that is, a resolution that will only take effect if certain conditions are met) given in subsection (4)(c) is necessary as a sub-division or consolidation of share capital (or any class of it) may form part of a wider re-organisation of a company's share capital, for example, a reduction of share capital following a redenomination of share capital. It may, therefore, not be appropriate, or necessary, for a company's share capital to be altered in this way if the reorganisation of share capital that the sub-division or consolidation is linked to does not go ahead.

891.     At the moment a company may only sub-divide or consolidate its share capital if it is authorised to do so by the company's articles of association ("articles") (see section 121 of the 1985 Act). This restriction has not been retained but, if they wish, the members may restrict or prohibit the authority given to a company by this clause, by including a provision to this effect in the company's articles. There will be transitional arrangements for existing companies.