Regulations on Allotment of Shares and Debentures according to Companies Act for a Company Formation of Great Britain

21 Nov

The members or more correctly the subscribers of the memorandum are important persons in whose presence companies house incorporate a company. No company can be formed without at least one member. The members of the company may be given shares in the company. Nothing can be done by a company without its members and officers. The Companies Act 2006 and the older versions along with the constitution of a company define the rules and responsibilities of a shareholding member or a member in general. Companies Act 1985 discusses about the rules to distribute shares in the company in Part 4.

Definition of Member

A member has been defined in the 22nd section of the Companies Act 1985 as:

  • The people who subscribe to the memorandum of the company are assumed as giving their consent for the membership of the company and after the registration of the company, they may be included in the register of members.
  • The people apart from the subscribers who give their consent to own the membership of the company and whose names are also mentioned in the members’ register will be considered as the members of the company.

So, after the members subscribe to the memorandum and the relevant documentation is provided to the registrar, then companies house incorporate a company. The registrar should be kept aware of the shares that each subscriber is given.

Company Authority for Different Allotments

Section 80 of Companies Act 1985 states that:

  • No permission is given to the directors to make use of any power for allotment of relevant securities if they under this section or section 80 A are given an authority by either of the following:
  • In a general meeting by the company.
  • The constitution of the company.
  • By the term “relevant securities” it means:
  • A company’s shares that are not mentioned in the memorandum to have been seized by those who subscribe to the memorandum or the distributed shares under any scheme of shares of an employee.
  • An authority for the subscription of or the conversion of any security into a company’s shares. This may not include the allotted shares.

The reference given for the distribution of shares includes any such authority. However, this does not include distribution of any share in pursuant to such authority, under the subsection (6) of this section.

  • Any particular or general use of power may be ratified under this section and it may be subjected to conditions or not.
  • It should be mentioned by the authority that how many relevant securities are being allotted at max, and the date of expiry of that allotment as well. The date should be within the 5 years of any of the following date:
  • If the authority was included in the constitution at the time of formation of the company, then the date of incorporation will be considered.
  • Otherwise, the date of passage of the resolution for the authority will be considered.

However, any such power must be in any general meeting of the company be varied or cancelled prior.

  • The renewal of the authority can be done in any general meeting provided the new date for expiry date would be of not more than 5 years. The amount of shares that have to be allotted or the amount of shares left to be allotted under any case, must be mentioned in the resolution again, along with the date of expiry of the renewed authority.
  • Any authority for the distribution of such rights as defined by the second subpart of the second clause of this section, the maximum number of relevant securities that may be authorised for allotment referred by the 4th clause also correspondingly referred by the 5th clause of this section, is the maximum numbered shares that can under the right be allotted.
  • It is allowed to the directors to make any allotment of the relevant securities despite the fact that the authority has expired, if they have signed any agreement before the expiry of the allotment that allows them to make an allotment after its expiry. Or in case when it was authorised to sign agreements that required the allotment of certain securities after the expiry of the authority.
  • The resolution passed for the cancellation, variation or renewal of any such authority, might regardless of the fact that it brings a change in the articles of the company, can be an ordinary resolution. However, it should be subjected to the Section 380 of this Act that states that the copy of the passed resolution should be shared with the Registrar within fifteen days.
  • If any director gives a deliberate permission for the contravention of this section, he will have to pay some fine.
  • Any allotment cannot be invalidated by anything in this section.
  • The provisions of this section are inapplicable on allotment of any securities that are relevant, except for a company that has been registered as public regarding its original incorporation, if the allotment is done under any agreement that was signed before the date that was earlier amongst the following dates:
  • The date when the first general meeting was held after the registration or re-registration of the public company.
  • 22nd of June 1982.
  • However, if any resolution regarding the grant, variation or cancellation of any authority for the fulfilment of Section 14 of the 1980 version of Companies Act or this section, remains effective if it was passed after the end of April 1980.

Private Company’s Right to Elect the Span of Authority

Before one register a ltd company with companies house, he should know that the rules governing the conduct of limited or private companies may differ from the rules for public companies or any other form of company. Such different rules are mentioned in Section 80 A of Companies Act 1985 which states that:

  • It may be elected by a private company via an elective resolution, following the section 379A, that this section’s provisions will be applicable as a replacement to the 4th and 5th clause of section 80 regarding the renewal and granting of any power under that section after the election.
  • It must be mentioned in the authority that what is the maximum amount of securities that are relevant and can be allotted by that authority and may be entrusted for:
  • A limitless period.
  • A period of fixed amount, where the date of expiry is mentioned.
  • The authority that may remain valid for a fixed duration can be subjected to renewal or may be renewed further via a general meeting.
  • The resolution for renewal of authority:
  • Should include the number of shares to be allotted or left to be allotted under it.
  • Should include if the duration is unlimited or limited of the renewal of authority and the expiry, if it is a limited duration.
  • The relevant securities’ maximum amount that can be allotted should be referred by the 6th provision of Section 80.
  • If under this section, any election stops to remain effective, any enforced authority of a limitless duration or a period limited but greater than 5 years:
  • That has been authorised a limited duration of 5 years or more prior the election stops to remain effective, will expire immediately.
  • In any other case it will remain effective as such that it was given a fixed duration of 5 years.

Limitations of Offers made publically by Private Companies

As a guidance for how to setup a private limited company UK these provisions, as mentioned in the Section 81 of Companies Act 1985, become a path to follow. The private companies have to face some restrictions regarding the allotment of shares or debentures. These are mentioned as follows:

  • A private limited company, that may not include a company limited by guarantee and not keeping a share capital, will be termed as committing an offensive act if it:
  • Makes an offer publically regarding the company’s shares or debentures either in the form of cash or any other form.
  • Makes an allotment or agreement of allotment for the shares or debentures of the company, with an intention of making either all of it or any of the debentures or shares publically available in the form of cash or otherwise (lying within the interpretation as given by the sections 58-60).
  • Any company that commits any offensive act in relation to this act or any officer relevant will have to pay some fine.
  • Any debenture or allotment or auction of shares or any agreement for either of these purposes, cannot be invalidated by any of the provisions of this section.

Applying for Shares or Debentures and their Allotment

Section 82 of Companies Act 1985 states that:

  • In relation to any prospectus issued, the shares or debentures of the company cannot be allotted. Moreover, no lawsuit should be brought following the requests made in relation to the issued prospectus unless it is the third day after the first issuance of the prospectus or after the specified day in the prospectus.
  • The third day or the day specified by the prospectus commences when the subscription lists are opened.
  • The first issuance of prospectus refers to the first time when the prospectus was issued via a newspaper ad. Also, if it is not issued in any newspaper ad prior the third day after it is issued in any other manner, then, it refers to the day of its first issuance in any other manner.
  • While calculating the third day:
  • Any day that is Sunday or Saturday or a holiday for bank in the Great Britain, and intercedes between the counting days, will not be given any consideration.
  • If the third day being calculated coincides with either Sunday or Saturday, or any holiday of Bank then, there should be a substitution for the first day after that which is not amongst them.
  • No allotment can be invalidated if any of the provision from 1 to 4 of this section contravenes. However, during any contravention, the company along with all the officers that are in default will have to pay the fine.
  • Applicable to any prospectus that may offer shares or debentures for auction the above mentioned clauses will be subjected to the following modifications:
  • The references to allotment will be replaced by the reference to sale.
  • Any reference made to the company and all of its officers that may be in default will be replaced by a reference given to a person who makes the offer and deliberately allows for contravention.
  • If there is any request made regarding the company’s shares or debentures in relation to the issuance of prospectus, it cannot be cancelled in general, until after the third day expires after the subscription lists were opened or a proper public notification is shared before the expiry of the that day and the notice is issued by someone authorised for the prospectus under the sections 67-69 and remains effective under these sections to limit or exclude the duties of that person.

The subscribers subscribe to the memorandum to register a ltd company with companies house. Later these subscribers become the members and hold shares in a company formation of Great Britain. These amount of shares given decide the impact of members at the time any voting process. Hence, their allotment is a subject of great interest.

* The email will not be published on the website.