Shares are units of ownership in any company—the most common two types of shares, ordinary and preference. Ordinary shares allow the holder to vote at annual general meetings. In contrast, preference shares give their holders the right to a fixed dividend and a repayment of capital ahead of all other shareholders.
Ordinary shares are the most common type of shares in a company. They are also known as common shares. Ordinary shareholders own the company and have voting rights that allow them to vote on key decisions, such as electing directors or approving an acquisition. They receive dividends and profits from the sale of assets. Ordinary shares carry more risk than other types of shares in case of bankruptcy, but also it is more rewarding if the company is successful.
Preference shareholders are entitled to receive their dividend before ordinary shareholders, usually based on a fixed rate. This means they get paid out first if there’s not enough money for everyone else or even if the company is incurring losses. On the other hand, preference shareholders don’t get any voting rights in how the company’s run (unless they convert into ordinary shares).
The allotment of shares is the number of shares that a company decides to make available for sale, which is determined by the board of directors. The board uses their discretion to determine if they will issue new shares or if they will use existing unissued shares in order to raise additional capital. The statutory entitlement to allotment of shares is governed by the Companies Act 2006, which is a critical aspect of the companies law framework in that it governs the various mechanisms companies use to raise capital.
In order for the directors to be authorised to allot shares, they must have authority from the shareholders who pass it by an ordinary resolution (shareholders’ meeting) or by way of a written resolution, i.e., shareholders’ circulation.
Such authority can be general or specific and can apply to shares of a particular class or description. Generally speaking, any resolution granting authority should include a statement that:
● The number of shares that may be allotted as fully paid up; and/or
● The consideration for which those shares may be allotted.
Sections 549, 550, and 551 give directors the power to allot shares under the company’s articles or by way of an ordinary resolution.
Pre-emption right of existing shareholders
In the UK, existing shareholders have a pre-emption right that gives them the opportunity to purchase shares before they are offered to anyone else. A pre-emption right is a protection granted by the law or by contract to a shareholder of a company to prevent the dilution of existing shareholders’ interests in the company.
For example, the [COMPANY] is looking to raise GBP [AMOUNT] million through the issuance of new shares. In order to protect existing shareholders, the company intends to grant them a pre-emption right (or right of first refusal) on these new shares. This right will entitle the existing shareholders to purchase a proportionate number of new shares before they are offered to any new investor, preventing their percentage ownership in the company from diluting. It also gives them the first crack at investing in the company again if they think it is a suitable investment.
It is noteworthy that by virtue of section 567(1) of the Companies Act 2006, the pre-emption right can be excluded in private companies by a provision included in the articles. A special resolution under section 569 can also disapply this right.