Welcome to the fourth article in our mini-series covering the basics of shares in which we’ll be covering the share capital alterations.

Before reading this article, it might be useful to refer to articles one, two and three in the series.

As before, the focus in these articles is on UK private companies limited by shares.

Share capital alterations – the what and the why

During the life of a company, it may become apparent that the existing share structure is no longer suitable or appropriate. There are various changes that can be made to existing shares to better meet the needs of the company and its shareholders, depending on the situation at hand.

Re-designations of shares

When re-designating shares, some or all of the existing shares are re-classified into different share classes (either existing or new).

Re-designations are undertaken to give shareholders different share classes, perhaps with different share class rights.

Shares may be re-designated in order that dividends at different rates may be declared on each share class independently. Sometimes, the articles of association may include provisions for ‘automatic’ re-designations taking place on a particular event, such as an employee shareholder leaving the business.

For example, if Sharon and Bridget each own 50 ordinary shares in their company, they may wish to re-designate their shares so that dividends could be declared independently (i.e. dividends would no longer need to be split 50/50 in accordance with their ownership).

The following details will need to be confirmed in respect of a re-designation:

• The number and class of shares to be re-designated.
• The new share class name and share class rights to be attached to the shares.
• Whether the re-designation will have any impact on the rights attached to any existing share classes.
• The date of the re-designation.

Once the re-designation details are confirmed, the following steps will need to be undertaken:

• Check whether the articles contain any special provisions and ensure any procedures set out within the articles are followed. Articles should also be checked for any particular references to the existing share capital and share class rights – they may need to be updated if so.
• Shareholder resolutions will need to be passed to approve the re-designation (and any associated changes to the articles/existing share class rights).
• The directors should approve the re-designation and, for good order, minute the decision.
• The form SH08 and a copy of the resolutions should be filed with Companies House. A form SH10 may need to be filed too. If the articles need to be updated, a full copy of the amended articles should be filed with Companies House.
• The old share certificates should be returned to the company for cancellation, or an indemnity for a lost share certificate should be provided.
• The register of members can then be updated and new share certificates issued.

Subdivisions of shares

When subdividing shares, the existing shares are divided into new shares at a given ‘rate’, with each new share having a lower nominal value. Therefore, the total share capital remains unchanged.

For example, if a company has one ordinary £1 share in issue, this could be subdivided at a ‘rate’ of one hundred new shares for each share currently held. Therefore, the share would be subdivided into 100 ordinary shares of £0.01 each.

Subdivisions are useful when additional flexibility is required – for example, when transferring shares to new shareholders or prior to allotments of new shares taking place.

For example, if Tom has a company with only one ordinary £1 share in issue, he has very little flexibility if he wanted to transfer a small portion of the shares to a new business partner, Jude. He could subdivide the share into ten ordinary shares of £0.10 each, and then transfer 10% to Jude.

The following details will need to be confirmed in respect of a subdivision:

• The ‘rate’ at which shares are to be subdivided.
• The date of the subdivision.

Once the subdivision details are confirmed, the following steps will need to be undertaken:

• Check whether the articles contain any special provisions and ensure any procedures set out within the articles are followed.
• A shareholder resolution will need to be passed to approve the subdivision.
• A shareholder resolution will need to be passed to approve the subdivision.
• The directors should approve the subdivision and, for good order, minute the decision.
• The form SH02 should be filed with Companies House.
• The old Share Certificates should be returned to the company for cancellation, or an Indemnity for a lost share certificate should be provided.
• The register of members can then be updated and new share certificates issued.

Consolidations of shares

The consolidation of shares is the ‘opposite’ of a subdivision – in this case, shares are ‘aggregated’ into a smaller number of shares each with a larger nominal value.

For example, if a company has 100 ordinary £0.01 share in issue, they could be consolidated at a ‘rate’ of one new share for every ten shares currently held. Therefore, the shares would be consolidated into ten ordinary shares of £0.10 each.

Consolidations may be undertaken to simplify the share capital structure.

Redenominations of shares

When redenominating shares, the currency of the nominal value of the shares is changed.

For example, a company with ordinary shares with a nominal value stated in GBP (£) may wish to change the nominal value to USD ($) or EUR (€).

Redenominations may be undertaken if a company is regularly undertaking transactions in a different currency or is operating in a particular country/region. For example, it may be more convenient if investments are being received to redenominate the shares into that same currency.

How Gerald Edelman can help

Whilst we hope that this article provides a useful summary on other common alterations of share capital, we know that every company is different. If you wish to discuss the shares in your company, please contact us today.

Look out for our next article in this series which will cover share capital reductions and buybacks!