With no par value under section 39, the question is not what a share is “worth” but what the company received for it. Sections 46 to 47B of the Companies Act 1997 supply the discipline.
Section 46 — consideration may take any form
The consideration for which a share is issued may take any form and may be cash, promissory notes, contracts for future services, real or personal property, or other securities of the company.
That is a deliberately wide list. It permits shares for an asset, shares for a business, shares for services yet to be performed, and shares issued on the conversion of a loan. What controls the arrangement is not the form of the consideration but the board’s valuation and certification of it.
A shareholder is not liable to pay or provide consideration for shares issued under section 42 unless (a) the constitution specifies the consideration for those shares, or (b) the shareholder is liable under a pre-incorporation contract or a contract entered into after registration.
So the founding shares of a company with no constitution and no subscription agreement carry no payment obligation at all — which is why the first shares of most small companies are simply issued.
Section 47 — what the board must do
(a) decide the consideration for which the shares will be issued and the terms on which they will be issued; and
(aa) if the shares are to be issued other than for cash, determine the reasonable present cash value of the consideration; and
(b) resolve that, in its opinion, the consideration for and terms of the issue are fair and reasonable to the company and to all existing shareholders.
(a) stating the consideration for, and the terms of, the issue; and
(aa) describing the consideration in sufficient detail to identify it; and
(ab) where a present cash value has been determined, stating that value and the basis for assessing it; and
(b) stating that, in their opinion, the consideration is fair and reasonable to the company and to all existing shareholders.
The board shall deliver a copy of the certificate to the Registrar within 10 working days after it is given (s 47(3)). A director who fails to comply with subsection (2) or (3) commits an offence, with the penalty in section 414(2) (s 47(4)). A copy must also be attached to the section 44 notice where the consideration is wholly or partly non-cash.
Note the standard: fair and reasonable to the company and to all existing shareholders. An issue that is good value for the company but dilutes existing holders unfairly does not satisfy it — which is why section 47 and section 45 work together.
Sections 47(5) and 47A — the exceptions
| Provision | Excluded issue |
|---|---|
| s 47(5)(a) | Issue on the conversion of any convertible securities — because section 47B applied when they were issued |
| s 47(5)(b) | Issue on the exercise of any option to acquire shares — same reason |
| s 47A(a) | Shares fully paid up from the reserves of the company, issued to all shareholders of the same class in proportion to their holdings — a bonus issue |
| s 47A(b) | Consolidation and division of shares in proportion |
| s 47A(c) | Subdivision of shares in proportion |
The logic is consistent: where nobody’s relative position changes — a pro rata bonus issue, a split, a consolidation — there is nothing for the board to value or certify.
Section 47B — options and convertible securities
(a) decide the consideration and terms for the securities or options, and in either case for the shares; and
(b) if the shares are to be issued other than for cash, determine the reasonable present cash value; and
(c) resolve that the consideration and terms are fair and reasonable to the company and to all existing shareholders; and
(d) if other than for cash, resolve that the present cash value of the consideration is not less than the amount to be credited for the issue of the shares.
The directors who vote in favour must sign a certificate covering all of those matters (s 47B(2)), and the board must deliver a copy to the Registrar within 10 working days (s 47B(3)). Failure by a director to sign, or by the board to file, is an offence (ss 47B(5), (6)).
Shares to be credited as paid up, wholly or partly, as part of an arrangement involving the transfer of property or the provision of services and an exchange of cash or cheques or other negotiable instruments — whether simultaneously or not — must be treated as paid up other than in cash to the value of the property or services.
In other words, a circular arrangement in which cash goes round in a loop to disguise a non-cash subscription is treated for what it is, and the full valuation and certification requirements apply.
Read section 47B with section 41: a contract or deed requiring the company to issue shares — on exercise of an option, on conversion, or otherwise — is unlawful and void unless the board has authorised the issue under section 43 and complied with section 47, or all shareholders concur, or the obligation is expressly made conditional on the board doing so.
Practical guidance
- Get an independent valuation for any significant non-cash consideration. Section 47(2)(ab) requires the certificate to state the value and the basis for assessing it, so the basis must be defensible.
- Describe the consideration precisely — paragraph (aa) requires enough detail to identify it. “Assets of the XYZ business” is not enough; schedule them.
- Be careful with contracts for future services. Section 46 permits them, but the board must still value them at a reasonable present cash value, and services not performed leave the company having issued shares for nothing.
- Diary 10 working days for filing the certificate; the offence is personal to the directors.
- Structure options and convertibles under section 47B at the outset, so that no further certificate is needed on conversion or exercise.
- Make option and convertible instruments conditional on board authorisation and section 47 compliance, to stay outside section 41(1).
- Do not overlook section 48 — written consent is required before issuing a share that increases or imposes a liability on the holder, or the issue is void.
Sources
- Companies Act 1997 — ss 39, 41–49, 79, 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.