Business Law 2019-2020: Student Resources is no longer available and it was replaced by Business Law 30e Student Resources.
Well done. You have completed this learning activity. You can now print the feedback.
Fact pattern
Wildheart Limited (“Wildheart”) has three directors, each of whom owns 1,000 ordinary shares of £1 each in Wildheart. (There are no other shareholders in Wildheart.) Wildheart was incorporated in November 2009 and has the Model Articles for Private Companies as its articles. The board of Wildheart has decided that Tracy Jones (“TJ”) should be introduced as a new investor. TJ will take 1,000 ordinary shares of £1 each and pay a total of £50,000 cash for her investment. She will also be appointed to the board as a director.
(1) Under the Companies Act 1985, all companies were required to have an authorised share capital. This is no longer the case under the 2006 Act.
(2) All shares issued by a company must have a nominal value, but this value may not equate to the value actually paid for them – see para 11.2.3.
The board is empowered through the articles to exercise all the management powers of the company; this will include allotting shares.
In cases where a private company has only one type of share in issue and is proposing to allot further shares of the same type, s. 550 grants directors authority to allot shares without prior reference to the shareholders. (Note that the effect of s. 550 can be diluted or displaced by the company’s articles.)
S. 561 only applies to allotments:
Both these conditions are fulfilled in this instance.
The effect of s. 561 can be excluded by the methods set out in ss. 567 – 571; however, each section is context-specific. Here the section which is relevant is s. 569.
By this stage it has been established that a special resolution of the shareholders and a board resolution is necessary. The former will have to be passed at a general meeting (or by written resolution) before the board is in a position to pass its resolution to make the allotment.
See para 11.2.6 for further discussion on the registration obligations which can arise on an allotment of shares.
As previously considered at question 1, the effect of the allotment will be to increase Wildheart’s issued share capital by £1,000. In addition, a share premium account will be created in Wildheart’s balance sheet to reflect the total premium of £49,000 which TJ has paid. In this way, the full £50,000 investment into the company will be reflected in the balance sheet.One of the consequences of an allotment of shares can be a dilution in voting power. Whilst none of the original shareholders has lost any shares, each of the original shareholders has relinquished negative control, as their stakes in the company have been reduced from a third to a quarter. This also means that consideration should be given to any required changes to the company’s PSC register.