Introduction to share issuance
Issuing shares comes with a lot of jargon. We'll try to keep it simple, but just know that you'll hear it referred to by various terms such as raising equity, selling stock, or creating share allotments. Here we list key considerations if you are considering creating new shares, a step-by-step guide to the full process, and how to get help with issuance.
Why issue company shares?
The main reason to issue shares is to raise new finance, usually used to expand the business. This differs from share transfers, where the company receives no new money.
What kind of shares can you issue?
A company may wish to create a share class with different characteristics, which would be more appropriate or attractive to specific types of investors or shareholders.
The kind of characteristics that are typically varied are:
- the rate of dividend payments
- whether the shares have voting or non-voting rights
- are they redeemable, i.e. the investor can at times sell the shares back to the company for their nominal value
- do they have preference rights attached, meaning that they are higher priority for payment of dividends or return of cash in the case of insolvency than ordinary shares
Varying these characteristics changes share classes' risk and reward profiles, meaning certain classes are more attractive to investors depending on their risk appetite and desired reward potential. For example, a share class designed to attract long-term investors might differ from a share class made for an employee share scheme.
A step-by-step guide to issuing shares
Here is an overview of the steps involved in issuing more shares of an existing share class or creating a new share class. This process differs from when you first set up the company, where the shares are created at the same time as part of the formation process.
Let us assume that you have already explored alternatives to raising finance other than issuing new shares and have decided that issuing shares is the best option.
Check for any legal restrictions
First, you will need to establish that there are no legal restrictions to issuing the shares. Check the articles of incorporation for the company and, if any exist, the shareholder agreements already in place.
One of the most common restrictions that can apply are pre-emption rights from existing shareholders. These exist to protect shareholders from being diluted and mean that the new shares need to first be offered to existing shareholders, in most circumstances.
Understand the tax implications
The issuance of shares to employees and to connected parties can have tax implications, so it is essential to understand what these might be. If in doubt, ask your accountant, as you can easily open yourself up to a legal challenge from HMRC.
For example, there are special rules that apply to shares issued as incentives to employees as well as requirements around the value that shares can be issued at. We will talk a little about valuation later in this article but be aware that you will usually not be able to issue shares at a discount to the deemed market value of the shares.
Offer the shares
Subject to any restrictions, the next step is to offer the shares to potential shareholders. Those wishing to take up the offer will need to complete an application form for new shares and return this form to the company along with the payment required for the shares issued.
The directors need to determine the value of the business to know the price to offer the shares and understand the valuation point used for taxation. To learn more about the valuation of shares, read our post on Valuing your business.
Allot the shares via board resolution
After the offer, you will convene a board meeting where the directors review the application forms received and approve those that meet requirements.
The company will document its decisions in a board resolution that confirms the approvals and handle the various legal notices that need to be made. Your accountant or corporate lawyer will provide you with an appropriate template that covers all the required points that should be covered.
Issue share certificates
Within two months of the application being approved, the company must send share certificates to successful applicants. The company will generally notify shareholders sooner than this because the share allotment only becomes binding once the company has notified the relevant shareholder applicant.
Until notified, the applicant has the right to withdraw their application, so it is in the company's best interests to avoid this possibility by being quick to issue the certificates.
Notify Companies House
The company must notify Companies House within a month by submitting an SH01 form. This form lets Companies House know about the new shares issued and the updated share capital of the business. Details of who owns the shares are not provided on this form; this is provided on the company’s following Confirmation Statement.
Additionally, if the shareholdings mean there is a change in who is considered a Person of Significant Control (PSC), then you must also update your PSC register and notify Companies House of those changes.
Update your statutory share registers
You need to update your statutory share register of both holders and allotments within two months of the date of the share issue. These registers are required by law and detail exactly who owns the company and the various share transactions that have happened since the company was formed.
Your accountant will normally be the person maintaining your share registers, but if you have engaged a corporate lawyer, it may well be them that handles this. It is worth being clear on who takes responsibility for maintaining your registers as this is an area where it is a common mistake to see duplication of work.
Update share capital on your balance sheet and Confirmation Statement
You will need to update your accountant about any changes to share capital so that they can correctly reflect this in your end of year accounts.
You will also update Companies House on the new shareholdings on your next Confirmation Statement. You can submit your statement early, for example, to provide comfort to shareholders that the deal has been processed, and indeed, some investors may insist on this action as part of the transaction.
What needs to happen as part of a new share issue?
Let us summarise the key roles and responsibilities in the share transfer process and list the actions taken by the respective parties to the transactions.
Tax-planning and alphabet shares
Are there any tax planning opportunities in issuing shares? In short, yes, but there are specific considerations and HMRC rules that apply. The two main areas of tax planning are using different share classes to pay different dividend rates and granting shares as an incentive to employees.
Using alphabet shares to pay different dividends rates
Alphabet shares are another name for different classes of shares. These share classes are so-called because most often they are set up as ‘Ordinary A’, ‘Ordinary B’, etc. When a company declares a dividend, it must pay all shareholders of that class in proportion to the nominal value of their holdings.
The ability to vary the dividend per share class creates a tax planning opportunity where you can pay a higher rate of dividends to certain shareholders. The most common would be a husband and wife scenario where one partner has a lower income than the other and as a result, is in a lower tax bracket. In this case, you might choose to pay a higher dividend to the partner who is currently in a lower tax bracket.
Issuing shares to employees
You may wish to issue shares to your employees as an incentive or bonus. There are special tax rules that apply when granting shares to employees, which mean that shares received from an employer are normally taxed in a similar way to salary.
However, it is possible to set up HMRC approved employee incentive schemes which allow you to make grants of stock to employees in a more tax-efficient way. This can allow the shares received to be treated as a capital gain which is usually taxed at a lower rate than income.
Setting up an employee share scheme is a complicated process but you have the option to have the valuation point for the shares confirmed by HMRC in advance of setting up the scheme, which provides certainty on the tax treatment. The process, including liaising with HMRC, typically takes 4-8 weeks.
What is HMRC’s position on alphabet shares?
HMRC is likely to challenge any arrangement that seeks to artificially avoid paying taxes, particularly if HMRC can argue that the dividend payment is a form of salary, rather than a return on capital.
In the case of a husband and wife, there is case precedent for this to be an acceptable arrangement, most famously in Jones v. Garnett where the difference in dividend rate paid was permitted because of a tax allowance for gifting assets between spouses.
However, other cases, for example, alphabet shares set up to pay different dividends to employees, have been challenged successfully in court by HMRC. Similarly, cases where one share class can only be paid if other share classes are not paid, typically fall short of the anti-avoidance provisions in HMRC’s tax legislation.
So, if setting up a complex share structure, be aware that there are pitfalls. You open yourself up to a certain level of risk of challenge from HMRC.
Getting help with issuing company shares
At Ecommerce Accountants, we offer a range of company secretarial services, including share issuance. We will provide you with all of the documentation required to complete a new share issue, guide you through the process, as well as connect you with reliable partners if needing to set up an employee share scheme or take legal advice on a proposed arrangement.
If you are running an ecommerce business and looking for a safe pair of hands to work with you on the accounting side, get in touch with us today.