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Transferring Shares vs Issuing New Shares

 

A common topic often raised following the successful formation of a company is whether to transfer a number of existing shares to a new shareholder or whether to increase the total number of shares currently in issue and distribute some or the entire new batch to them.

This article explains the differences between the transfer of existing shares and the creation and subsequent issue of new equities. It should be noted that professional advice should be sought before concluding on a particular course of action and the full ramifications of  it understood.

Recent Events Affecting Shares

The abolition of authorised share capital has made the decision of how many shares to issue when registering a company more acute. The ability to create a large distributable but unpaid reserve of shares from the point of incorporation no longer exists.

Thus the Companies Act change which now prohibits the creation of an authorised share class requires those setting up a new company to focus their thoughts on how many units, classes (and there resultant denominations) the company will practically require in its immediate and longer term future.

Transferring Shares - Stock Transfer Form

Shares in private limited companies (and those which are public) can be transferred from one owner to another using a stock transfer form. This document contains details of both the transferee (buyer) and the transferor (seller), the type and number of units transferred and the consideration given in the exchange.

Depending on the valuation given towards the shares which are transferred including any non monetary payments such as services, intangible items or equipment stamp duty might be payable. As a general rule, in situations where a share transfer payment exceeds £1000 it is the responsibility of the purchaser to inform HM Revenue and Customs, furnish them will a completed stock transfer form and resultant stamp duty payment within 30 days of the transaction taking place.

Failure to do so can result in penalties and interest being applied to the late amount and whilst there are provisions to cater for exceptional circumstances, such as acts of god and proven postal delays, the application of penalties are generally levied consistently.

Transferring shares in a limited company requires no interim notification to be given to Companies House. Essentially the company has the exact same number of shares in issue; it is just that some or all of that quantity are now owned by different people or entities.

The transfer should be entered in the relevant section of the company statutory register as the Companies Act mandates that these are kept up to date at all times in case of a request to inspect the material is delivered at the registered office.

Official communication with Companies House and the wider public concerning share transferring activities undertaken in the company during a given reporting period are stipulated on the Annual Return AR01 Form. This document is due within 28 days following the anniversary of the date of incorporation of the company.

When transferring shares it is common for companies to complete and file an Annual Return early thereby providing the purchaser and seller parties with official recognition of the transaction at Companies House.

When certificates of good standing and any resultant notary and apostille verification of current shareholders is required, the above option of a prompt submission is frequently taken.

Download Stock Transfer Form

Download Stock Transfer Form here

Issuing New Shares - Form SH01

Should the current shareholders decide to issue new shares in the company instead of distributing their existing holdings, then they can arrange for the company to allot new equities in a way which will result in a predetermined ownership pattern.

The following examples demonstrate how depending on the number of current shares held and the desired proportion of ownership to be achieved after the allotment, how the mechanism of issuing shares might be approached.

For the purpose of the example we assume a single shareholder owns the total number of shares in existence before the issue of the new equities and will continue to be the majority shareholder following the allotment.

  Scenario:1 Scenario:2 Scenario:3 Scenario:4
Number of shares in existence before the issue: 1 10 100 1000
Number of shareholders after the issue: 2 2 3 5
Percentage of shares to be held after issue: 50:50 80:20 40:40:20 40:25:15:15:5
Number of shares which could be issued to satisfy the requirement: 1 90 150 2500
Total number of shares in issue on completion: 2 100 250 3500

Compared to the transfer of existing shares, the issuing of new shares does not attract HM Revenue and Customs stamp duty and thus might provide an added incentive to steer towards this option.

Unlike the task of transferring shares which does not require immediate communication with the Registrar of Companies, issuing new shares does require notification to be given.

This is carried out utilising the Form SH01, Return of Allotment of Shares which depicts the numbers and classes of new units being draw and the subsequent effects on the overall statement of capital of the company.

The Annual Return (either completed straight after or at the usual time) then reconciles with the SH01 and lists the total number of shares and their resultant ownership.

Both transferring and issuing (new) shares results in the new holder being provided with an official share certificate which signifies their ownership of the stock in the company.

This can presented to a bank or other third party or institution as evidence of their interest in the company and whether or not they have a controlling or minority stake.

Download Form SH01

Download Form SH01 here

Conclusions

When considering the options for issuing an increased number of shares at the time of company registration to cater for the eventuality that new shareholders will materialise or opting initially for a reduced number and then making fresh issues as and when necessary, there are some important considerations to be borne in mind.

The absence of stamp duty might be attractive to potential investors where a new allotment will take place whereas a reduced number of shares at the inception of the company might portray it as being  small and underfunded.

Also, once shares are allotted (at whatever stage), they create an immediate  liability towards the company which the person holding them must avail themselves of by paying their nominal or market value, whichever is higher.

Thus a proposal to issue one million shares of £1 each at the company formation stage will give rise to a debt of an equal amount to the person they are issued to. Whilst to debt might be diluted by transferring some of the equity to new shareholders, in the event that the expected investors do not emerge, the one million pound obligation would remain with the once optimistic subscriber.

Form SH01 and Stock Transfer Form requires a PDF reader such as the one downloadable free from Adobe.

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