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Common mistakes with increasing share capital and changing share rights

Have you sought to either increase your share capital (same class of share or additional class of share) or change the share rights of existing shares since your company has been incorporated?

If so (or you are thinking of doing so), please read on.

We are increasingly uncovering issues (either upon a more general review, but often when a due diligence process is being undertaken (in relation to lending, or mergers and acquisitions)) whereby none or only part of the correct legal process has been undertaken.

Often all that has been done is that the (purported) change in share capital has been reported to Companies House on the confirmation statement (or where going back further in time, the annual return).

This leaves the company and its shareholders in a position whereby the share capital changes are, most likely, invalid.  As it is a difficult, costly and time consuming process to rectify the position, uncovering such issues can often jeopardise the transaction which caused our instruction in the first place.

If you think that this may be an issue which your company is facing or may face (following a historical change), then please get in touch for specific advice.  If you are intending to undertake an alteration in your share capital, then your legal advisors will consider the following issues:

Is there the power to make the changes required?

Do the articles of association provide a general authority to allot further shares and is this still valid?  Is the company able to rely on statutory powers to allot instead?

Is there any specific restriction in the articles to the number of shares which can be issued?  Does the proposed allotment breach that restriction?  If there is a restriction, are the directors and existing shareholders on board with taking the necessary action to remove the troublesome restriction?

Are there any applicable pre-emption rights? These might be found in the articles, in a shareholders agreement and/or in statutory provisions.

Do you need class consent to make any changes in share rights that may be proposed?  Practically speaking, will those consents be forthcoming?

Are there any specific requirements or consents in any shareholders’ agreement not already covered above?

What is the correct process to follow?

There are specific processes to be followed, depending on what is intended to be achieved.  In most cases it is likely that board minutes, shareholder resolutions, Companies Houses form(s) and write up of the company’s statutory registers will be required.  There are often time limits applicable to filings which the company/the directors need to adhere.

Why specialist legal advice is highly advisable

Even small changes in the share capital in your company, if not properly done, can cause significant problems, both immediately and many years down the line.

It is always, therefore, worth taking specific legal advice before undertaking any changes to ensure they are done correctly.

Get in touch

Our Corporate and Commercial team specialist lawyers can provide all the advice you need on increasing share capital and changing share rights.

Please contact either Marina MacLennan, Partner and Head of Corporate Commercial, or Solicitor Ciaran Keane

Email: Marina.MacLennan@wards.uk.com Phone: 0117 929 2811

Email: Ciaran.Keane@wards.uk.com Phone: 0117 929 2811

 

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