Last updated on August 30th, 2019 at 02:29 pm
What does it mean if a company sub-divides its share capital?
Sometimes referred to as a ‘stock split’ by those more familiar with US legal terminology, the subdivision of share capital refers to the process whereby a company that has shares of one nominal value decides to split those shares into shares of a smaller nominal value. For example, if a company has one share issued with a nominal value of £0.20, it could sub-divide this share into two shares with a nominal value of £0.10 each. While the company in this instance has changed the nominal value of the shares, the aggregate nominal value of the issued share capital remains the same. The subdivision will not alter the rights to dividends, capital or voting control that attaches to the shares, it only changes the number and nominal value of each share.
What does nominal value mean?
Also known as ‘par value’, a share’s nominal value means its face value, as opposed to its actual market value which will usually be much more. The nominal value of a share is really just an arbitrary value allotted to that unit. Most new UK companies are registered with a book (nominal) value of £1 each, but it is possible for it to be set as low as £0.0001 pence.
Why would a company decide to sub-divide its share capital?
The main reasons why a company may decide to sub-divide its share capital is to improve the liquidity of the shares to allow more affordable investment opportunities and also enable the right number of shares to be issued that equate to small percentages of the company’s share capital that investors have agreed to subscribe for.
To give an extreme example, a long established and successful company might have issued just one share of nominal value £1.00 held by the sole shareholder. Therefore that one share will represent a large market value.
If the owner of this one share wants to sell part of his shareholding, or issue new shares to an investor who (for example) wants to acquire 10.5% of the entire issued share capital in return for (for example) putting £250,000 into the company, then the existing one share may be subdivided by 10,000 to create 10,000 shares of nominal value £0.0001 each. The sole owner can then transfer such number of those existing shares as he wishes to, while a relevant number of new shares can be issued that matches (or is as close as possible to) the agreed 10.5% of the company’s total issued share capital (once the new shares have been issued). If the company issues 1,174 new shares on top of its existing 10,000 shares then those new shares will represent 10.50653% of the company’s enlarged total issued share capital of 11,174.
What is the legislation that governs subdivision of share capital?
The subdivision of share capital is governed by sections 618 and 619 of the Companies Act 2006.
Section 618 grants a company the ability to sub-divide its share capital via a resolution of the members. Section 618(3) does not outline what type of resolution needs to be used, so this means by operation of section 281(3) of the Act that an ordinary resolution of the company’s shareholders will suffice. However, if the company in question has bespoke Articles of Association (or a Shareholders Agreement) that requires a special resolution of the shareholders to be sought where a company wants to sub-divide its share capital, then the company must adhere to this requirement and obtain a special resolution in that case.
Section 619 of the Companies Act 2006 requires a company that exercises the power conferred to it under section 618 to notify Companies House (‘the registrar’) within one month after the subdivision and specifying the shares affected within a statement of capital. Failure to notify Companies House following a subdivision of capital is an offence and the company and its officers would be liable to prosecution and a fine being imposed on them.
How does a company sub-divide its share capital?
Step 1 – Check articles of association
- If the company has unamended Articles of Association then the company will have the right to subdivide its share capital.
- If the company has bespoke Articles of Association then the first step in the process will be to analyse the company’s Articles and check to make sure that there is no explicit restriction/prohibition on the company being able to sub-divide its share capital.
- If there is a restriction then the relevant provisions in the company’s articles will need to be followed. If there is an absolute prohibition then the company will be unable to sub-divide its share capital unless the company obtains a special resolution from its members and amends the company’s Articles to erase the prohibition.
Step 2 – Check whether a shareholders’ agreement exists
- Regardless of the fact that a subdivision of share capital will leave each shareholder’s equity holding in the company unchanged, if there is a shareholders’ agreement in place this will also need to be adhered to.
- The shareholders’ agreement may impose certain notice or consent requirements in respect of a subdivision of share capital which will need to first be complied with before moving onto the next stage of the process.
Step 3 – Call a general meeting of the shareholders to propose ordinary resolution
- The board must then call for a general meeting of the shareholders to take place so that an ordinary resolution can be passed to sub-divide the company’s share capital.
- Note that this process could also be carried out via the written resolution procedure as well.
- An ordinary resolution may be passed by a simple majority of the shareholders (i.e. over 50% of the shareholders that attend the general meeting must vote in favour of the subdivision taking place).
- It is not obligatory to send this ordinary resolution to Companies House; however, the company must keep a record of it internally.
Our shop includes both a board resolution and a shareholders resolution (together with thorough guidelines) that can easily be adapted so that a company can simply subdivide its share capital without requiring any outside assistance. The board resolution could instead be produced as a set of board minutes, but we prefer the board resolution format as it will be easier for most boards to pass decisions this way rather than actually call a meeting (which minutes are taken at to record decisions).
Step 4 – Subdivision takes effect
- Provided that the ordinary resolution required at step 3 was passed, the subdivision of share capital will take effect.
Step 5 – Give notice to Companies House
- At this stage the Company must give notice of the subdivision of share capital to Companies House as required by section 619 of the Companies Act 2006.
- As previously mentioned, this notice must be given within one month of the subdivision taking place.
- The notice should be given to Companies House using form SH02. The sections of this form that need to be completed will be sections 1, 2, 4, 7 and 10. The form must then be signed at section 11.
- The notice should include various details as set out in section 619 of the Companies Act 2006, these include:
- The class, number and nominal value of the shares consolidated or sub-divided.
- A statement of capital
- The date on which the members’ resolution consenting to the subdivision of share capital was passed.
Step 6 – Update internal registers and issue new share certificates
- The final stage of the process will be for the company to ensure that it updates its register of members to reflect the subdivision. The register must be updated so as to reflect the number of shares each shareholder holds (if changed) and the new nominal value of each share they hold.
- The company can then decide whether to simply amend the old share certificates so as to reflect the subdivision, or they can issue new share certificates to the shareholders which will simultaneously give those shareholders notice that the subdivision has taken place.