Division 2 of Part VI of the Companies Act 1997 governs every issue of shares after incorporation.
Section 42 — the first shares
(a) forthwith after registration, issue to the persons named in the application for registration as shareholders, the number of shares specified in the application; and
(b) in the case of an amalgamated company, forthwith after the amalgamation is effective, issue to any person entitled under the amalgamation proposal the shares to which that person is entitled.
These issues are automatic and need no board resolution. Under section 46A, a shareholder is not liable to pay consideration for shares issued under section 42 unless the constitution specifies the consideration, or the shareholder is liable under a pre-incorporation contract or a contract entered into after registration.
Section 43 — all later issues
(1) Subject to this Act and the constitution, the board may authorise the issue of shares at any time, to any person, and in any number it thinks fit.
(2) Where the board authorises shares conferring rights other than those in section 37(1), or imposing any obligation on the holder, the board shall approve terms of issue setting out those rights and obligations.
(3) Terms of issue (a) shall be consistent with the constitution, and to the extent they are not are invalid and of no effect; and (b) are deemed to form part of the constitution, and may be amended in accordance with section 33.
Section 43(3)(b) is easily missed. Approved terms of issue are deemed to form part of the constitution — so they bind under section 32 as a contract between the company and each shareholder and between shareholders, they are only amendable by special resolution, and altering them may engage the interest group process in section 98.
The constraints on the board’s power
| Constraint | Section |
|---|---|
| Pre-emptive rights — shares ranking equally with or prior to existing shares must first be offered to existing holders, unless the constitution negates, limits or modifies this | s 45 |
| Consideration determination and certificate — the board must decide the consideration and certify it fair and reasonable | ss 47, 47A, 47B |
| Restrictions in the constitution — overcome only by shareholder approval under s 44A | ss 43(1), 44A |
| Interest group approval where the issue affects a class’s rights | ss 98, 44A(4) |
| Consent where the share increases or imposes a liability on the holder | s 48 |
| Directors’ duties — good faith and best interests, and proper purpose | ss 112–116 |
| Options and convertibles must be authorised or expressly conditional | ss 41, 47B |
Section 44A — issuing despite a constitutional restriction
(1) Notwithstanding section 43, if shares cannot be issued by reason of a limitation or restriction in the constitution, the board may issue them if it obtains approval in the same manner as approval is required for an alteration to the constitution that would permit such an issue.
(2) Subject to the terms of the approval, the shares may be issued at any time, to any person, and in any number the board thinks fit.
(3) Within 10 working days of approval, the board must ensure notice in the prescribed form is delivered to the Registrar.
(4) Nothing in this section affects the need for interest group approval under section 98 if the issue affects that group’s rights.
(5) Failure to comply does not affect the validity of an issue of shares.
(6) Failure to comply with subsection (3) is an offence by every director, penalty as in section 414(2).
Section 44A lets the shareholders authorise a specific issue without amending the constitution first — the approval is given in the same manner as an alteration would be, that is, by special resolution. That saves a two-step process, and subsection (5) protects the issue itself from being unwound for a procedural slip.
Section 44 — notice of share issue
(a) the number of shares issued; (b) the names and other prescribed details of the shareholders; (c) the class of shares; and (d) the consideration for which they were issued.
Under section 44(2) the shareholder details in paragraph (b) need not be included where the company complies with sections 67 and 68 and either more than 100 shareholders were issued shares under the notice, or the company is subject to a listing agreement with a stock exchange.
Under section 44(3) the notice must have attached any terms of issue approved under section 43(2), and where the shares were issued wholly or partly for consideration other than cash, a copy of the section 47(2) certificate. Failure to comply is an offence by every director (s 44(4)).
Sections 48 and 49 — consent, and when a share is issued
The issue of a share that (a) increases a liability of a person to the company, or (b) imposes a new liability on a person to the company, is void unless that person, or an agent authorised in writing, consents in writing to becoming the holder before it is issued.
This protects against partly paid or obligation-bearing shares being pushed onto someone. Read with section 83: a shareholder is not required to acquire shares by an alteration to the constitution made after they became a shareholder.
Except as otherwise provided in an exemption given by the Registrar under section 77, a share is issued when the name of the holder is entered on the share register.
So the register entry, not the board resolution or the payment, is the moment of issue. That makes the share register under section 67 the definitive record, and explains why section 70 imposes a directors’ duty to supervise it.
Issuing shares — the checklist
- Check the constitution for limits; if there are any, use section 44A.
- Deal with pre-emptive rights under section 45, or confirm the constitution negates them.
- Approve terms of issue under section 43(2) if the shares differ from the section 37 default.
- Determine the consideration and pass the section 47 resolution; sign and file the certificate within 10 working days.
- Obtain written consent under section 48 if any liability attaches.
- Enter the holder on the share register — that is when the share is issued.
- File the section 44 notice within one month, with the terms of issue and any section 47(2) certificate attached.
- Issue a share certificate if one is requested under section 75.
Sources
- Companies Act 1997 — ss 32, 33, 37, 41–49, 67, 68, 70, 75, 77, 83, 98, 112–116, 414
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.