Allotment of Shares
Shares may be allotted on the initial formation of the company or at a later date. The first subscribers are usually the parties to the constitution/ memorandum and articles of association. They may subscribe for shares of nominal value, in the case of a private company. A public company must have at least the minimum issued share capital required by law.
An allotment is an issue of shares, usually on foot of an application. An allotment of shares may be governed by a contract between the subscriber and company. There may be an invitation, form of application and acceptance. The application by the shareholder is generally an offer, and the acceptance by the company constitutes a contract. The applicant becomes a shareholder upon allotment and registration as a member.
Generally, a person becomes a member of a company (a shareholder), whether on allotment, transfer or otherwise, when his name is entered on the register of members. The register of members is maintained internally by the company secretary. It is not filed in the Companies Registration Office. Details of members are returned on each annual return. Alternatively, details of changes in membership may be filed.
No Invitation to Public / No Listing by LTD
Public limited companies may offer their shares and other securities to the public. They may list their shares on all markets, subject to admission to the relevant exchange. The exchange rules make further detailed requirements for admission.
A private limited company (an LTD which is the default and most common form of limited liability company) may not issue an invitation to the public for the issue of its securities. It may not apply to have its securities or interests in them admitted to trading on or be listed on an exchange, whether in the State or elsewhere. “Securities” include most types of interests in the capital of a company, including shares and debentures. Contravention of the requirement is a category 2 offence.
Exceptions for Private Companies
The prohibition on the issue of shares and invitations for thier issue to the public, by private limited companies (LTDs) does not apply to
- an offer of debentures addressed solely to qualified investors;
- an offer of debentures addressed to fewer than 150 people, other than qualified investors;
- an offer of debentures addressed to investors who acquire securities for consideration of at least €100,000 each;
- an offer of debentures whose denomination per unit is at least €100,000;
- an offer of debentures with a total consideration in the EU of less than €100,000, over a 12 month within the EU;
- an allotment of shares by a company addressed solely to qualified investors;
- an allotment of shares by a company addressed to fewer than 150 people; or
- an allotment of shares by a company addressed to both qualified investors and 150 or fewer other persons.
The prohibition does not apply to instruments which are normally dealt with on money markets, such as treasury bills, certs of deposit and commercial papers having a maturity of less than 12 months’ duration.
The above position accords with the EU-wide exemptions in relation to the issue of securities.
Issue of New Shares
Investments in companies are commonly made by way of a combination of shares and debt/ loans. Loans are easily repaid, whereas capital subscribed may be repaid in limited circumstances only. For this reason, monies are often subscribed by way of a minimal amount of share capital and a much larger amount by way of a loan. Sometimes the loan is constituted on terms by which it can be converted into shares on the terms specified.
The allotment of shares requires the payment of money, assets or other consideration to the company in return for the issue of shares in the company. Formerly, a 1% capital duty applied to the allotment of shares on the money or the value of the assets subscribed.
A subscriber for new shares in an existing company makes an application for allotment. The applicant agrees to give monies or other assets in return for the shares. The directors approve the application and allotment. The subscription price or other consideration is paid or provided. The company secretary then enters the name of the new shareholder in the register of members and issues a share certificate to the subscriber.
A distinction should be made between the purchase of existing shares and the allotment of new shares. In the former case existing shares, which have been allotted by the company at some time in the past are purchased from an existing shareholder. No money is paid to the company. The purchase price is paid to the existing shareholder. The company is involved only to the extent that an application to register the transfer of shares in the company register of members, must be made in orider to perfect the transfer. No consideration is payable to the company.
Price and Terms of Allotment I
In theory, the directors should issue new shares for a price or value at or near the market value of the existing shares. The increase in the value of the company by receipt of the subscription monies/ consideration should, in principle, be proportionate to the increase in the number of shares, so that value per share is unchanged. With a private company, there is unlikely to be a ready market for the shares. There are a number of methods of estimating the value of a private company’s shares, for the purpose of setting the allotment price for new shares.
In practice, new shares are not necessarily issued at a price or value that is equivalent to the existing share price. Share are often issued for different values and types of consideration and on more and less favourable terms. For example, one person may subscribe €1000 for a share, while another such as a key employee may pay a substantially lesser amount for the same share.
A person to whom shares are allotted may be entitled to renounce the allotment. This gives him the opportunity to sell those shares. The right to renounce may arise in the context of a rights issue or a bonus issue. The renounceable letter of allotment is subject to stamp duty.
Price and Terms of Allotment II
Companies (acting through their directors) have a considerable latitude and discretion as to the terms on which shares are allotted. The only restriction on the directors is that they act in good faith in the best interests of the company. The law does not generally intervene.
There are limits to this principle. The directors must act in good faith in the interests of the company in issuing new shares.This principle applies to the exercise of their powers generally. The principle also applies to the shareholders, where they are involved in the allotment, notwithstanding that they do not owe duties to the company, equivalent to those of directors.
If for example, the director/ shareholders issue shares to themselves or the associates at substantial undervalue for their purpose of diluting the other shareholders and taking a bigger portion of the company, then the court may intervene and the allotment may be set aside.
Authority to Allot I
Because shareholders’ rights can be diluted by the issue of new shares, company law provides certain protections for the existing shareholders. The shareholders have the statutory authority to issue shares and other securities. They also have a statutory right of pre-emption in respect of new shares and other securities, on the same terms offered to a third party. These rights can be delegated or waived.
There are exceptions to the requirement for authority. It does not apply to shares taken up under employee share schemes. It does not apply to existing rights to subscribe for or convert any existing security into shares or another type of security.
The authority to allot new shares rests primarily with the shareholders. It can and usually is delegated to the directors, by way of resolution or in the initial constitution/ memorandum and articles of association. Formerly the authority to allot shares could be given for not more than five years. It could be renewed for further periods of up to five years. The 2014 Act has removed the five-year limitation.
Authority to Allot II
The following provisions apply to the issue of shares in a limited company unless the constitution makes other provision. The provisions may be altered. In particular, the directors may be given wider powers to allot shares, and the statutory rights of pre-emption may be varied or disapplied.
Newly issued shares must be within the scope of the authorised unissued share capital. The allotment of shares must be authorised by or under a resolution of the shareholders or by the constitution. The authority to allot shares may be for a limited period. The authority is usually delegated to and shares are usually allotted by the directors. The default 2014 Act constitution delegates the authority to the directors.
The directors may be given the power to make a particular allotment or may be given powers generally to allot shares, by resolution of the shareholders in general meeting or by the constitution/ articles of association. It may be subject to conditions and caps. Formerly, it could be given for a maximum of five years only. The authority may be revoked or changed by the company’s members in general meeting. An ordinary resolution is sufficient. The resolution must be filed in the CRO.
Authority to Allot III
The default constitutional provisions under the 2014 Act. delegate the power to allot to the directors. This default will not necessarily apply to companies with pre-2014 Act constitutions, which may make other or inconsistent provision on the matter.
The 2014 Act does not limit the duration of the constitution’s or shareholders’ authority . There need not be a specified nor any requirement as to the maximum number of securities that may be allotted. Accordingly, an open-ended authority may be given by the shareholders to the board of director to allot securities.
The authority to allot shares may be given by the shareholders by ordinary resolution. This is so, even if it would involve an amendment to the company’s constitution, which would otherwise require a special resolution.
An allotment of shares in contravention of the above provisions is still valid (unlike the position with some other irregularities). However, a director who knowingly and willingly authorises an allotment in contravention is guilty of an offence.
Shareholders’ Rights of First Refusal
Subject to having the shareholders’ authority, the directors may issue new shares. The issue of shares may dilute the economic rights of existing shareholders unless they have the right to and do in fact take up their proportion of the new shares. 1983 legislation implementing an EC Company Law Directive provided for a statutory right of pre-emption for members (shareholders) on the allotment of equity securities.
The right of pre-emption applies to all public and private companies. It gives the existing shareholders the right of first refusal on the issue of new securities, in proportion to their existing holding.The right is given to the ordinary shareholders. It applies under th default 2014 Act provisions.
The statutory right of pre-emption for ordinary shareholders upon the allotment of shares may be disapplied by a special resolution of the shareholders. Pre-emption rights are often excluded. They are also commonly reserved.
The directors may be authorised to disapply the statutory pre-emption rights or apply them on conditions. As in the case of the authority to allot, the pre-emption right may be excluded in the constitution/ memorandum or articles of association, in the case of a private limited company.
The statutory right may be excluded or modified by special resolution of the shareholders. If the exclusion is proposed by the directors, notice of the meeting must be given together with a written statement of the reasons for the proposal. The proposal must be accompanied by reasons and recommendations from the directors for the amounts and conditions concerned.
Terms of Pre-emption and Exclusions
The statutory pre-emption right applies to all “equity securities” in the company. The right applies in proportion to the shareholders’ existing holdings. It applies to shareholders who held shares during the 28-day period prior to the date of the offer. The right originally required an offer period of 21 days, in which the shares might be taken up. The 2014 Act reduced the minimum period for acceptance of the offer from 21 to 14 days
Equity shareholders include all shareholders and those holding the right to subscribe for or convert securities into such shares. The pre-emption right covers all shares, other than those which in relation to dividend or capital, carry a right to participate only as to a specified amount
The statutory right of pre-emption does not apply to shares issued under an employee share scheme. Shares acquired pursuant to an employee share scheme are not covered, unless the scheme’s terms otherwise provide. The employees may obtain the benefit of this pre-emption right if the terms of the scheme so provide.
The pre-emption rights do not apply where there are equivalent contractual rights. The pre-emption rights may be written into the constitution or articles of association in different terms to the statutory rights or may be provided for by a shareholder’s agreement.
The terms of the statutory or any contractual pre-emption rights are a matter for interpretation by the courts. The courts will usually interpret the default provisions or articles in a manner that gives effect to their purpose, where there is no obvious literal interpretation or where the literal interpretation would make it unworkable.
Directors and others who authorise an allotment in contravention of the statutory right of pre-emption are jointly and severally liable to compensate persons who suffer a loss in consequence. The action for recovery may be taken by the shareholder within two years.
Consideration for Shares I
Companies, acting by their directors may determine in good faith, what the proper consideration for the new shares should be. The directors must act in good faith in the best interests of the company in issuing and allotting new shares. They may not expropriate the minority or act in a way that is inequitable and destructive of their basic rights.
Shares may be issued for cash or other consideration. This may include the rendering of services or the transfer of assets to the company. They may be issued for other consideration, such as the entry by the allottee into an employment agreement or service contract with the company.
Shares may be issued for different prices to different persons, provided that the directors act in good faith. Shares may be allotted without the requirement for immediate payment of the full consideration. The registered shareholder is liable to pay the balance due on the shares.
Consideration for Shares II
When shares are allotted, a return of allotments must be made within one month to the Companies Registration Office. It must set out details of the number and nominal values of the shares, the names of the allottee and the amount paid or payable on each share. Failure to make the return makes every officer in default subject to a fine on summary conviction.
Where shares are allotted for non-cash consideration, a return must be made to the Companies Registration Office of the contract in writing constituting the title to the shares or particulars of it.
There are restrictions on public companies (not private companies) in the issue of shares, other than for cash. In the case of a public company, the non-cash consideration must be valued by an independent expert. At least 25% of the nominal value must be paid. In the case of a private company, the price need not be paid up front.
Share Rights by Resolution
Where a company allots shares with rights that are not provided for in its constitution or in any resolution or agreement which is otherwise registrable, the company shall, unless the shares are in all respects uniform with the shares previously allotted, deliver to the CRO, within 30 days of allotting the shares, a statement in the prescribed form containing particulars of the rights.
Shares with special rights are not be treated for the purpose of registration as above as different to shares previously allotted, by reason only of the fact that they do not carry the same rights to dividends as the latter during the 12 months after allotment.
Where rights attaching to shares are varied otherwise than by way of resolution required to be registered or by amendment of the company’s constitution, the company shall within 30 days, deliver a statement in the prescribed form containing details of the variation of the rights. Contravention of the above registration obligations by the company or by an officer in default is a category 4 offence.
References and Sources
Companies Act 2014 Part 2 Ch 3 & 4 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.8 Courtney
Keane on Company Law 5th Ed. (2016) Ch 9Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law