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?
Replies (5)
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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
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."
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%.