These notes explain the share capital of companies incorporated under the Companies Act 1985

1. WHAT IS SHARE CAPITAL?
The share capital of a company is the fund which creditors of a company look to for security for payment of their debts.
From incorporation every company limited by shares has share capital. The amount is stated in its memorandum and is known as the "nominal" or "authorised" capital. Later it will have an "allotted" or "issued" capital, a "paid-up" share capital and perhaps a "reserve" share capital.

2. WHAT IS AUTHORISED CAPITAL?
The "authorised" or "nominal" capital of a company, set by the company’s first subscribers, is the amount in money up to which it may issue shares. The memorandum of the company must state how the share capital is divided into equal monetary units or groups of equal monetary units. The shares are then issued on the basis of these monetary units.

3. WHAT IS ISSUED CAPITAL?
"Issued" capital is the nominal value of the company’s shares (the value printed on the share certificate) actually issued to subscribers. The acquisition of issued capital makes a subscriber a member of the company. The amount of issued capital cannot exceed the amount of the authorised capital of a company.
A company need not issue all its capital at once, but before it can commence business, a public limited company must have at least £50,000 of allotted share capital, of which 25% must be paid up in cash.

4. WHAT IS ALLOTTED CAPITAL?
"Allotted" capital is a specific number of shares that subscribers to a company’s memorandum agree to take on incorporation. The shares are deemed to be issued on incorporation and "allotted" to each member by due process of law.
Later, people wishing to become members of the company would be offered shares. The offer should specify the number and type of shares, the price to be paid, how it is to be paid and any conditions attached to the shares. If the offer is accepted the directors can then authorise the allotment so that the person responsible for maintaining the company’s register of members can make the necessary entries and issue the share certificates.

5. WHAT IS PAID-UP, UNCALLED AND RESERVE CAPITAL AND A SHARE PREMIUM?
These terms are used to describe the make-up of a company’s share capital:

• "paid-up" capital is the issued capital which has been fully or partly paid up by the shareholders;
• "uncalled" capital is that part of the issued capital on which the company has not requested payment;
• "reserve" capital is that part of the share capital that the company has decided will only be called up in the event of and for the purposes of the company being wound up;
• "share premium" is the excess paid above a share’s nominal value. This excess must be recorded separately in the company books in a "share premium account" and used for the purposes specified in Section 130 of the Companies Act 1985.

As an example, if a company issues 1,000 shares @ £1 each, paid up to 20% of their value with a 10% reserve and a share premium of £0.50p, the shares are defined as follows:-

paid-up capital = £200 (1,000 x £0.20p)
uncalled capital = £700 (1,000 x £0.70p)
reserve capital = £100 (1,000 x £0.10p)
share premium = £500 (1,000 x £0.50p)

6. MUST PAYMENT FOR SHARES BE IN CASH?
No. The payment may be in the form of goods, property, or even shares in another company. The latter is often used when one company takes over another. However, in the case of public companies a non-cash consideration must be valued before shares are allotted.
In all cases a return of allotments must be sent to Companies House within one month, on Form 88(2) together with a certified copy of any agreement concerning the allotment if payment has not been made in cash. If the agreement is not in writing, Form 88(3) must be completed and sent to Companies House.
Capital duty on the allotment of shares for cash was abolished in 1988. However, the payment for shares other than in cash involves the transfer of some type of property which may amount to a chargeable transaction under the Stamp Act. In all such cases the contract or Form 88(3) delivered to Companies House must be stamped by the Inland Revenue Stamp Office, either with the duty paid, or confirming that none is payable.

7. WHAT IS THE MAXIMUM AND MINIMUM VALUE OF A COMPANY’S CAPITAL?
There is no maximum or minimum to a company’s authorised share capital. However, a public limited company must have an authorised capital of at least £50,000 and, before it can commence business, an allotted capital of at least £50,000. Each share must be paid up to at least one quarter of its nominal value, plus the whole of any premium on it.

8. CAN THE SHARES BE IN ANY CURRENCY?
Yes. Shares can be in any currency with different types of shares in different currencies. However, a public limited company must have at least £50,000 of its issued capital in sterling before it can commence business.

9. CAN A COMPANY CHANGE THE CURRENCY OF ITS SHARES?
No, not directly. A company may however seek a court order to reduce its issued capital to zero, cancel its authorised capital, and simultaneously create capital and allot shares on a pro rata basis in the new currency. It should be remembered that a public limited company must always have a sterling share capital of at least £50,000.

10. WHAT ARE THE DIFFERENT TYPES OF SHARES?
A company may have as many different types of shares as it wishes, all with different conditions attached to them. Generally share types are divided into the following categories:

• Ordinary As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be subdivided into classes of different value.
• Preference These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.
• Cumulative Preference These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.
• Redeemable These shares are issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot issue redeemable shares only.

11. WHAT ARE BONUS SHARES?
A company may, if authorised by its articles, transfer profits to its capital redemption reserve and use these distributable reserves to issue "bonus" shares to its members in proportion to their existing holdings. Since the issue may reduce the amount of money available for the payment of dividends, the term "bonus" is not always appropriate. The correct term is "capitalisation of reserves" but the terms "scrip" or "scrip issues" are also used to describe such shares.
Capitalisation of distributable profits can also be used to credit partly paid shares with further amounts as paid up.

12. WHAT IS A PRE-EMPTION RIGHT?
A company may give existing members the right to be offered new shares on beneficial terms. "Pre-emption" rights give those members the opportunity to accept, reject or renounce a share offer in favour of someone else before new shares are offered elsewhere.
(Note: there are exemptions for shares allotted for "equity securities", for payment other than in cash and security for employee shares).
A private company may have a clause in its articles saying "pre-emption rights" will not apply. However, a public limited company cannot have such a clause in its articles so its members will always have pre-emption rights.
For a particular share issue, the Companies Act 1985 allows a company to pass a special resolution not to apply the pre-emption procedures. This process is known as the "disapplication of pre-emption rights". The resolution will apply to the one issue only and a further resolution is needed if similar conditions were to apply to a subsequent share issue.

13. WHAT ARE SHARE WARRANTS?
A company may, if authorised by its articles, convert any fully paid shares to "share warrants". These warrants are easily transferable without any need for an instrument of transfer, that is, they can simply be passed from hand to hand.
When share warrants are issued, the company must strike out the name of the shareholder from its register of members and state the date of issue of the warrant and the number of shares to which it relates. A share warrant can, subject to the articles, be surrendered for cancellation, whereupon the holder is entitled to be re-entered into the register of members. Vouchers are usually issued with the share warrants in order that any dividends may be claimed.
The holder of a share warrant remains a shareholder but whether he is also a member of the company depends on the relevant terms of the articles of the company. A company which converts all its shares to bearer warrants should be careful in doing this as it could become a memberless company and consequently cease to exist.

14. CAN A COMPANY ALTER ITS SHARE CAPITAL?
A company can increase its authorised share capital by passing an ordinary resolution unless its articles of association require a special or extraordinary resolution. A copy of the resolution and notice of the increase on Form 123 must be filed at Companies House within 15 days of its being passed.
A company may decrease its authorised capital by passing an ordinary resolution to cancel any shares which had not been taken by any person.
A company may increase its issued capital by allotting more shares but only to the extent allowed by its authorised capital. A public company may allot these shares to the general public, but a private company is restricted to issuing shares to its members, to staff and their families and to debenture holders. By private arrangement, a private company may issue shares to anyone.
A company cannot normally reduce its issued capital as this capital is the personal property of the shareholder, not of the company. However the following exceptions apply:

• where a court order confirms a minute of reduction following a special resolution of the company;
• where shares are redeemed in accordance with a redemption contract;
• where the purchase by the company of its own shares is allowed by its articles and authorised by a special resolution. As a company cannot own its own shares, the shares are regarded as being cancelled on their purchase by the company.

15. HOW ELSE MAY A COMPANY ALTER ITS SHARE CAPITAL?
A company may if authorised by its articles of association:

• consolidate and divide its share capital into shares of larger amounts than its existing shares, for example 200 shares of £1 may be consolidated and divided into 100 shares of £2 (this can apply to either the authorised or issued capital of the company or both);
• subdivide its shares, or any of them, into shares of smaller amounts, for example, a £1 share may be sub-divided into ten 10p shares;
• convert all or any of its paid up shares into stock or re-convert stock into shares. A company cannot issue stock in the first instance. It can only convert issued shares into stock.

In all the above cases the total nominal value of the authorised and issued shares remains unaltered. Any of these alterations may be achieved by passing an ordinary resolution. Notice must be given to the Registrar within 1 month on Form 122.

16. CAN CLASS RIGHTS BE AMENDED?
Yes. A company may alter the rights attached to any class of shares. The procedure to be followed depends upon whether the rights are conferred by the memorandum or articles, or elsewhere. However, a company cannot convert non-redeemable shares into redeemable shares.
Dissenting shareholders may (if they hold at least 15% of the issued shares of that class) apply to the court to have the variation cancelled. They must do this within 21 days. Copies of the resolutions must be delivered to Companies House within 15 days of being passed.

17. CAN REDEEMABLE SHARES BE USED TO REDUCE ISSUED CAPITAL?
Yes. A company which has issued redeemable shares may reduce its issued share capital by redeeming those shares in accordance with the agreement under which they were issued. However, if the shares are not returned to the company in accordance with the agreement, for example, if they are returned at an earlier date than stated in the agreement, the transaction must be dealt with as a purchase of own shares.
Notification of a redemption of shares must be delivered to Companies House within one month on Form 122.

18. CAN A COMPANY PURCHASE ITS OWN SHARES?
Yes. A company may, if permitted by its articles, pass an appropriate special resolution to purchase some of its shares, but it cannot do this if it would leave only redeemable shares in issue.
The terms of the resolution will depend on whether the shares to be purchased constitute a "market purchase" that is, made on a recognised stock market, or an "off-market purchase".
An off-market purchase may only be made in accordance with the terms of a contract authorised in advance of the purchase by a special resolution, or under the terms of any contingency purchase contract which has been approved in advance by a special resolution of the company.
Purchase by a company of its own shares must be notified to Companies House within 28 days on Form 169 and, if the purchase by a private company is financed by payment out of capital of the company, the directors must also make a statutory declaration on Form 173 regarding the solvency of the company immediately after the purchase and in the next financial year. This declaration must also be delivered to Companies House.
The purchase by a company of its own shares is a chargeable transaction under the Finance Act 1986 and carries stamp duty at the rate of 50p per £100 or part of £100 of the re-purchase price. The Form 169 must be stamped by the Inland Revenue before delivery to the Registrar of Companies.

19. DO TRANSFER INSTRUMENTS NEED TO BE COMPLETED FOR REDEMPTIONS AND PURCHASE OF OWN SHARES?
No. As a company cannot own its own shares, neither of these transactions qualifies as a transfer of shares and the issued share capital of the company is automatically reduced on their return to the company. An instrument of transfer is therefore unnecessary.

20. CAN I BUY SHARES FROM SOMEONE ELSE?
Shares in a public company are normally transferred through a broker dealing in the market appropriate to those shares, that is, the Stock Exchange or the unlisted securities market. However, shares may be transferred directly from seller to buyer and the company informed accordingly.
Shares in a private company are usually transferred by private agreement between the seller and the purchaser. In both cases, an instrument of transfer must be completed.
The transfer of shares is normally a chargeable transaction under the Stamp Act at the rate of 50p per £100 or part of £100 of the transfer price. Stamp Duty must be paid to the Inland Revenue.

21. HOW ARE SHARES TRANSFERRED TO NEW OWNERS?
The transfer of shares in a public limited company is dealt with through the Stock Exchange "Crest" system.
To transfer shares in a private or unlimited company a seller must complete and sign the appropriate section of a "stock transfer form", available from law stationers, and pass it, together with the share certificate, to the new owner.
The new owner must then complete their section of the stock transfer form, pay any Stamp Duty to the Inland Revenue and pass the completed form and share certificate to the company. The company secretary will then arrange for the directors to authorise the change to the members’ register and issue a share certificate in the new name.
Do not send stock transfer forms to Companies House. They should be retained with the company’s own records.

22. WHAT IS A TRANSMISSION OF SHARES?
Generally a share transfer cannot be registered unless a proper transfer document has been delivered to the company. However, shares may in some instances be transmitted by operation of law. The main examples of this are when a registered shareholder dies or becomes bankrupt.
On death, shares held in the sole name of the deceased are vested in the personal representative or executor of the deceased. He should inform the company and provide all necessary evidence that the company might require so that the fact can be registered and the personal representative receive all notices and dividends relating to the shares. On the winding up of the deceased’s estate, the personal representative must inform the company of the beneficiary(ies) of the shares so that the necessary alterations to the register of members may be made and new certificates issued.
In the event of a share being jointly held, the survivor(s) will be the only person(s) recognised as having title to the share. The company should be informed immediately and be given any necessary evidence of the death in order to alter the register of members and issue a new share certificate.
The position of a bankrupt shareholder is similar. Share rights will vest in the trustee in bankruptcy but the bankrupt will remain a member and be able to vote, but only in accordance with the directions of the trustee.

23. WHAT HAPPENS IF A PERSON REFUSES TO PAY FOR SHARES?
If a member refuses to pay all or any call on a share, the company may invoke forfeiture proceedings if permitted by its articles. A typical procedure is set out in paragraphs 15-22 of Table A (if alternative provisions have not been adopted) of The Companies (Tables A to F) Regulations 1985. As these proceedings are of a penal nature the regulations must be followed exactly, otherwise forfeiture proceedings may be declared void by the court.
A forfeited share may be sold, re-allotted or otherwise disposed of at the discretion of the directors. No notification of the forfeiture or re-allotment need be given to Companies House other than in the list of members’ changes on the company’s next annual return.
If a person cannot pay a call on his shares and he and the company are in agreement, the shares may be surrendered to the company. This has the same effect as forfeiture but avoids the formal procedure otherwise necessary.
However, the company may only accept surrender in circumstances where it could have exercised its power of forfeiture. If these powers are exercised in circumstances which are not in the interests of the company, the share surrender may be declared void.
A private company may hold forfeited shares indefinitely pending re-allotment, but a public company must cancel the shares if not otherwise disposed of after three years. If the cancellation were to reduce a public company’s allotted capital below the statutory minimum, it would have to re-register as a private company.
Forfeited shares cannot be used by a company for the purposes of voting.

24. WHAT HAPPENS IF A SHARE CERTIFICATE IS LOST?
This will be dealt with in the company’s articles. For example paragraph 7 of Table A of The Companies (Tables A to F) Regulations 1985 allows for a replacement share certificate to be issued on the directors being assured that the old certificate has been lost, worn-out, defaced, or destroyed.
The directors will normally require any defaced or worn-out certificate to be surrendered and an indemnity signed regarding the use of any lost certificate. They may also require reasonable expenses to be paid in investigating any evidence of loss.

25. CAN A SHARE BE CANCELLED WHERE THE HOLDER CANNOT BE TRACED?
No. The share is not the property of the company to cancel. It is the property of the registered holder. In the event of a person eventually being declared legally dead, then transmission procedures should be invoked and the share transmitted to the beneficiary(ies). (See question 22).
A company may however, if authorised by its articles, retain any dividends which remain unclaimed after a certain period.

26. WHERE CAN I GET FURTHER INFORMATION?
You should consult your professional advisers on all share capital matters. You may also telephone Companies House on the number given at the end of this leaflet.