As corporate lawyers, we often use common corporate law terms without thinking and have to remind ourselves from time to time that not everyone (even experienced business owners) is as comfortable with these terms as we are. Here is a quick guide to some of these terms as a handy “cheat sheet” for anyone keen to have more understanding of the jargon of the corporate world.
A general term to refer to all kinds of share capital together. Under the current law, this will usually be intended to mean “issued share capital”.
Issued share capital
These are shares that the company has created, a shareholder has applied for and which have been registered in the register of members.
Allotted share capital
Although allotted and issued are often used interchangeably, they are technically not the same. A share is allotted when it has been applied for and the applicant has the unconditional right to have those share registered against his name. However, it is not issued until it is actually registered.
Authorised share capital
This is now a more or less historical term. Until the 2006 Companies Act, each company would have both an authorised share capital and an issued share capital. The authorised share capital would be the number of shares the company was permitted to issue (including those in issue), while the issued share capital was as defined above. A resolution of members was required to increase the authorised share capital. Nowadays, a company may or may not have an upper limit on the number of shares the directors are authorised to issue without further shareholder consent. However, it would more typically be referred to as a limit on the directors’ authority rather than the authorised share capital.
Nominal value, share premium and paid up value
Shares each have a value attached to them, but this will not always be the amount which has been paid for them. The most common nominal value for shares is £1. This means that for a company with 100 shares of £1, the shareholders have paid (or are due to pay) at least £100 into the company which is at risk if the company fails. If a shareholder has been issued shares and has paid more than the nominal value for those shares, the additional amount is known as the “share premium” and the aggregate of both is the “paid up value”.
Denomination of shares
Shares can have a nominal value of any amount and in any currency. This can be changed by ordinary resolution of the members. Therefore, although most companies may only have ordinary shares of £1 each, some companies might have shares worth £0.10 or €2 each. Subdividing shares, for example, from £1 shares to £0.01 shares can be useful when shares are to be divided among a number of parties and the arithmetic causes problems. Shares can also be consolidated into larger nominal values, and can also be redenominated into different currencies.
Transfer of shares
Shares can be transferred between different people and entities. The transfer will not be fully complete until the transfer document (where required) has been stamped by the stamp office and registered in the company’s register of members. Where the transfer is for a greater or lesser amount than the share was issued for, it makes no difference to the share’s nominal value or premium.
Buyback of shares
A company can, in certain circumstances, buy its own shares from a shareholder. This is often referred to as a “buyback”. Once bought back, the company can either cancel the shares, so they cease to exist, or can hold them as treasury shares.
Shares a company holds in itself. After a buyback of shares, a company may choose to hold the bought back shares in treasury for a number of reasons. It may be simpler to transfer them out of treasury than to cancel and re-issue shares (such as for employee share schemes). It can help restore a company’s distributable profits after a buyback.
Private and public companies
In very simple terms, a public company offers its shares to the public often on a stock exchange, while private companies cannot offer their shares to the public. The company law regimes are different in certain areas between the two types of companies, and public companies are typically subject to stricter regulations and reporting standards. Public companies’ names will end in “plc” and private companies’ names will usually end in “Limited” or “Ltd”.
Bonus issues and rights issues of shares
Bonus issues are where existing shareholders are issued new shares in proportion to their current shareholdings, and they are paid up out of the company’s reserves rather than by the shareholders themselves. A rights issue is an offer of new shares to existing shareholders in proportion to their existing shareholdings (which they are free to accept or decline), and is usually offered for a discounted price which the shareholder has to pay.
Put and call options
For various reasons, there are often agreements in place which provide someone the option to buy or sell shares. This can be a right to subscribe for new shares in a company, or to purchase/sell shares to another entity or person. A “put option” is where the seller has the right to sell at his option (usually at a pre-agreed price and during a fixed timeframe). A “call option” is where the buyer can trigger the right to buy the shares (again, usually at an agreed price and during a fixed timeframe).
Shares which either the company or the holder (or sometimes both) have the right to redeem at some point in the future or in accordance with certain conditions. They are often treated like a sort of loan to the company and will often have preferential dividend rates and rights upon a return of capital, especially if they are “redeemable preference shares”.
Rights of existing shareholders to have first refusal on the issue of new shares. There is a statutory set of pre-emption rights which apply be default and which can be altered in a company’s articles of association. It is sometimes also used to refer to a right of first refusal given to existing shareholders upon the transfer of existing shares.
Memorandum of association
Historically, this was a document which set out the company’s powers, objects and its authorised share capital (among other things). However, the 2006 Companies Act changed this and the historical contents of the memorandum of association are now contained within a company’s articles of association. The memorandum remains now purely as a declaration made upon a company’s incorporation.
Articles of association
A company’s articles are its constitution which set out the rules by which a company is regulated. It is a public document (available on the Companies House register) and constitutes a contract between the company and each of its members.
Members and shareholders
In most cases, members of a company are simply that company’s shareholders who are registered in the register of members. However, companies limited by guarantee (rather than shares), such as most charities, will have members without shares, so they are members but not shareholders.