ABSTRACT
Companies may be financed by two forms of capital: equity and loan capital. The former is raised through the allotment of shares which create membership rights in the company that allots them. The number of shares that a company may allot is determined by the denomination of its shares and the amount of its authorised share capital. The authorised share capital may be increased as required to create new shares if the articles of association permit (Companies Act 1985, s 121). The type of shares a company may allot is determined by the nature of the classes of the shares, if more than one, comprised in the authorised share capital; the rights attaching to each class are usually set out in the articles of association. A typical capital clause in the memorandum of association of a company will be worded as follows:
A company with this capital clause may allot 150,000 ordinary shares and 100,000 10% redeemable preference shares. Whilst a company is limited in the number of shares it may issue by the amount of its authorised share capital and the denomination of the shares comprised within it, the only limit on the amount a company may raise on the allotment of shares is the amount investors are prepared to pay for them. A share cannot be allotted for a price which is at a discount to its nominal value (Companies Act 1985, s 100). This does not prevent a company making an allotment of partly paid shares on the basis that the company may call for the balance of the issue price to be paid at a later date. A company which allots a share at an issue price which exceeds its nominal value makes an allotment at a premium. When a company issues shares at a premium, whether or not the consideration is paid in cash, a sum equal to the aggregate amount or value of the premiums on those shares must be transferred to the share premium account (Companies Act 1985, s 130(1)). Restrictions are placed on the use which a company may make of the share premium account; the balance on the share premium account is subject to the statutory provisions in the Companies Act 1985, relating to reduction of share capital. It can only be applied by the company to pay up unissued shares to be allotted to members as fully paid bonus shares; to write off the preliminary expenses of the company; to pay the expenses of, or to settle the commission or discount allowed on any issue of shares in the company; or in providing for the premium payable on the redemption of debentures by the company (Companies Act 1985, s 130(3)).
