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Share issue at discount

A limited company has 1,000 authorised shares at nominal value £5,000 per share. The business has allotted two shares at this stage, 1 share to each of the two directors, the two shares are fully paid up for £10,000. A new investor wishes to buy a third of the authorised equity (333 shares) for £333,000 at a discount of £4,000 per share under the par value.

If I remember correctly it is not permissible for companies to issue shares at a discount (not sure why this would be, they are after all allowed to issue at a premium?). The business is keen to get the investment it needs but the investor wants 33% of the business for his money. The business has a net worth of just £10,000 at this stage, so the investor is paying £333,000 for just 33% of £10,000 (as the potential for the business is very good). Although the shares would be issued at a discount they are in fact way over the balance sheet valuation of the percentage ownership being given away.

What's the best way forward to expedite this deal?

 

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One third

If the investor is to acquire one-third of the business he should acquire just one share.  There will then be 3 shares in issue and he will hold one of them.

The nominal capital of his one share will be £5,000 and there will then be a share premium account credit of the remaining amount which he pays (£328,000).

David

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Why authorised share capital?

Why be concerned with authorised share capital?

"Companies Act 2006 makes general provision for alteration of share capital (Chapter 8 of Part 17) and removes concept of authorised share capital."

http://www.legislation.gov.uk/ukpga/2006/46/section/617

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David/ petersaxton, I agree the simplest way is to just issue one share for the full consideration and post the difference to share premium. All three shareholders get 33% job done.

Under section 551 of the companies act the directors are allowed to allot shares as they see fit for a period of 5 years. You could then get a precarious situation where new investor Mr A pays £333,000 for his one share (getting 33% of the business). Then just one week later the two directors could allot a new share to a friend for the nominal value of £5,000. All of a sudden Mr A's holding drops from 33% to just 25%. Even if Mr A insists he has a seat on the board he might not be able to prevent the future issue of shares at £5k, and since this is not a rights issue for a public company there is no requirement to offer shares to the original shareholders first? How would you protect against dilution in this way?

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Shareholder agreement

You could have a shareholder agreement

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Two things

1. Isn't the concept of authorised share capital now abolished and therefore irrelevant to the argument? Please do clarify if you have knowledge.

 

2. Has Mr A considered that it may be in his interest to take under 30% of the business in  any case so that he may qualify for S(EIS). The 3% is largely irrelevant in terms of the other shareholders "ganging up" on him - they can anyway. Plus, the (S)EIS tax clawback plus savings on the Capital Gain on disposal may outweigh the value of the 3%.

 

 

 

 

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