New issues by old companies under the Companies Act 2006

The procedures for issuing new shares under the Companies Act 2006 (‘2006 Act’) are potentially much simpler than under the Companies Act 1985 (‘1985 Act’). Companies incorporated under the 2006 Act (i.e. on or after 1st October 2009) can take full advantage of the new regime immediately. However, companies incorporated under any previous Act (i.e. before 1st October 2009) must pass through a number of hoops before they can do so. This article explains the difference between the new and old rules and the transitional provisions that apply to companies incorporated before 1st October 2009. Throughout the article, we refer to these companies as ‘existing companies’ as they were companies that were already in existence on 1st October 2009, the date on which the new regime came into force and on which it first became possible to incorporate a company under the 2006 Act.

Authorised share capital
Under the 1985 Act, every company limited by shares was required to include in its memorandum of association a clause setting out its ‘authorised share capital’, which operated to limit the amount of share capital that the company could issue. A typical clause for a small private company would say something like: “The share capital of the company is £100 divided into 100 shares of £1 each.” A company with such a clause could not issue any more than 100 £1 shares without increasing the amount stated as its authorised share capital. If authorised by its articles to do so, a company could effect this increase by ordinary resolution and, on doing so, was required to file a copy of the resolution at Companies House together with a notice of the increase on Form 123 (s. 121 & 123, 1985 Act).

Under the 2006 Act, the concept of authorised share capital has been abolished. Companies incorporated under the 2006 Act are not required to adopt an authorised share capital clause at all, although they can still voluntarily place a limit on the amount of share capital which can be issued by making suitable provision in their articles.

For existing companies (i.e. those already in existence before 1st October 2009), the authorised share capital clause is now deemed to form part of the company’s articles rather than its memorandum by virtue of s. 28 of the 2006 Act. It is also treated as a provision setting the maximum amount of shares that may be allotted or issued by the company.

However, as there is nothing in the Act which requires any company to have an authorised share capital clause, it can be amended or deleted in the same way as any other article provision. In the ordinary course of events, this would require a special resolution. However, existing companies are allowed to amend or revoke the clause by ordinary resolution by virtue of a transitional provision contained in para. 42 of Schedule 2 to the Eighth Companies Act 2006 Commencement Order (SI 2008/2860). [All of the transitional provisions referred to in this article from Schedule 2 to SI 2008/2860 are reproduced below].

Accordingly, when an existing company sets out to issue new shares for the first time under the 2006 Act regime, it may need to decide (if it has not already done so) whether to keep its authorised share capital clause or whether to revoke it so that there is no limit.

If it decides to keep the clause, it may need to increase the limit in order to proceed with the new share issue. If it decides not to keep the clause, it could revoke it by ordinary resolution in accordance with para. 42 and/or delete it by following the procedures for amending the articles.

Before deciding which option to take, it will be necessary to take into account whether the directors will be required to obtain authority from the members under the 2006 Act in order to allot any new shares.

If they are, it may not be considered quite so important to retain the restriction in the old-style memorandum clause on the maximum amount of shares that may be allotted.

Authority to allot

Allotment is the crucial stage in the share issue process at which the company enters into a binding contract with subscribers for the issue of new shares. Under the 1985 Act, it was an offence for the directors of any company to allot new shares unless they had been authorised to do so by a resolution of the members or by the company’s articles.

This is also generally the case under the 2006 Act. The default rule under the 2006 Act is that the directors are not permitted to allot shares in the company (or securities convertible into shares) or to grant any right to subscribe for shares unless they are authorised to do so by a resolution of the company or by an authority contained in the articles of association (s. 549 as amended by SI 2009/2561). However, this rule is subject to a number of exceptions. It does not apply in the case of subscribers’ shares agreed to be taken on the formation of the company, the allotment of shares (or grant of share options) under an employee share scheme or the allotment of shares pursuant to rights to subscribe for or convert securities into shares in the company.

In addition, the directors of a private company incorporated under the 2006 Act do not need to be given authority to allot if the company has only one class of share in issue (i.e. ordinary shares) and they are proposing to allot further shares of the same class (s. 550, 2006 Act). Unfortunately, this rule does not automatically apply to a private company incorporated under an earlier Act. However, such a company may adopt the rule by passing an ordinary resolution to that effect (SI 2008/2860, Sch. 2, para. 43) (see example resolution 3).

In relation to an existing company, an authority to allot in force immediately before 1st October 2009 under section 80 or 80A of the 1985 Act (or the equivalent provisions in the Northern Ireland Order) has effect on and after that date as if given under section 551 of the Companies Act 2006 (SI 2008/2860, Sch. 2, paras. 44 and 45).

The required authority under s. 551 may be either conditional or unconditional and may authorise the directors to allot shares in specified circumstances or may be expressed in more general terms. It must, however, state the maximum amount of shares which may be allotted thereunder and the date on which it will expire, which must be not more than five years from the date of the resolution or, if the authority is contained in the articles of association adopted at the time of incorporation, not more than five years from the date of incorporation of the company.

The authority may be given by ordinary resolution and, even if given by special resolution or in the articles of association, may be revoked, varied or renewed by ordinary resolution. Any resolution renewing an earlier authority must again specify an expiry date, within five years from the date of the renewal resolution, and must state the amount of securities which may be allotted (or the amount remaining to be allotted). A copy of any resolutions giving authority to allot must be filed with the Registrar and attached to any copies of the articles (ss. 29 and 30).

If the terms of the authority given so permit, the directors may allot securities after the expiry of the authority if the securities are allotted in pursuance of an offer or agreement made by the company before the authority expired. If securities are allotted without the required authority, this does not affect the validity of the allotment, but any director knowingly and willfully permitting or authorising such allotment will be guilty of an offence.

Procedural checklist for a share issue under 2006 Act

A. Authorised share capital

1. If the company was incorporated under the 2006 Act (i.e. on or after 1st October 2006), proceed to B (Authority to allot) after checking whether the articles contain a voluntary limit on the amount of share capital which may be allotted. If they contain such a limit and the limit would be breached by the proposed issue, the relevant article will need to amended by special resolution.
2. If the company was incorporated under a prior Companies Act (i.e. before 1st October 2009) check whether the authorised share capital clause has already been deleted or revoked and, if so, proceed to B (Authority to allot). Any resolution(s) to delete or revoke the authorised share capital clause should have been filed at Companies House and should have been embodied in the company’s articles of association.
3. If the authorised share capital clause has not been deleted or revoked, check whether the amount stated in the clause needs to be increased in order to proceed with the proposed issue? If so, the company must either:
• increase the amount stated as the authorised share capital (see
  example resolution 1); or
• revoke the operation of the authorised share capital clause (see
  example resolution 2).

B. Authority to allot

1. Authority to allot (see example resolution 4) is required if the company is:
   • a public company;
   • a private company with more than one class of share in issue;
   • a private company with only one class of share in issue but which proposes to issue new shares of a different class.
2. If the company is a private company incorporated under the 2006 Act (i.e. on or after 1st October 2006) which has only one class of share in issue and which proposes to issue new shares of the same class, authority to allot is not required (see s. 550).
3. If the company is a private company incorporated under a prior Act (i.e. before 1st October 2009) which has only one class of share in issue and which proposes to issue new shares of the same class, authority to allot will be required unless the members have previously resolved that s. 550 should apply. It should be possible to ascertain from the articles and or from the records held at Companies House whether such a resolution has been passed as the resolution should have been filed at Companies House and embodied in (or attached to) the articles.
4. If the company is an existing private company with only one class of share and it proposes to issue shares of the same class and there is not an existing authority to allot, it could:
   • pass an ordinary resolution applying s. 550 so that the directors do not need to be given authority to allot new shares of the same class on this or any future occasion (see
     example resolution 3);
   • pass an ordinary resolution giving the directors authority to allot shares in accordance with s. 551 (see
     example resolution 4), ensuring that the authority does not allow any remaining restriction in the memorandum to be exceeded.