Share issue at discount

Share issue at discount

Didn't find your answer?

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)

Please login or register to join the discussion.

David Winch
By David Winch
15th Jul 2012 23:10

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

Thanks (0)
By petersaxton
16th Jul 2012 07:16

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

Thanks (0)
avatar
By zelizeli
17th Jul 2012 15:50

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?

Thanks (0)
By petersaxton
17th Jul 2012 15:53

Shareholder agreement

You could have a shareholder agreement

Thanks (0)
avatar
By cparker87
18th Jul 2012 16:34

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%.

 

 

 

 

Thanks (0)