Share capital: formula sheet

Key formulas

Order of capital amounts

Authorised ≥ Issued ≥ Called-up ≥ Paid-up

Each figure is a part of the one before it. Authorised is only a limit, if one applies.

Unpaid on issued shares

Issued capital − Paid-up capital = Unpaid (called but unpaid + uncalled)

Split it into called-unpaid (Called-up − Paid-up) and uncalled (Issued − Called-up).

Uncalled capital

Uncalled = Issued − Called-up

Shareholders have no liability to pay this until a call is made.

Unissued capital

Unissued = Authorised − Issued

This is the room left to allot new shares without altering the limit.

Default preference rights

Preference (no contrary terms): dividend presumed cumulative (arrears carry forward); non-participating in surplus profits and assets

Rights attached to a class come from the constitution and terms of issue. Check the question and do not assume extra rights.

Authority to allot

Directors can allot only with authority from the articles or an ordinary resolution

Authority states a maximum number of shares and an expiry date, usually no more than five years, though it may be renewed.

No issue at a discount

Issue price ≥ nominal value

Issuing below nominal value is prohibited. Issuing above it creates a share premium.

Share premium

Share premium = issue price − nominal value, per share

The total premium is recorded in the share premium account and treated as capital.

Consideration for shares

Payment = money or money's worth

Public companies face tighter rules on non-cash payment, such as valuation and no undertaking to do work or perform services.

Membership

Allotment gives a right to become a member; entry in the register makes the person a member

The two events happen at different times.

Proportionate offer

New shares offered to a holder = new shares being issued × (holder's existing shares ÷ total existing shares)

Offers are made in proportion to existing holdings. Round sensibly, as part-shares cannot be issued.

Scope of the right

Applies to: equity shares + issued for cash. Does not apply to: non-cash issues or employee share schemes

State both limits when asked what the right covers.

Offer period

Offer must stay open for a minimum period (commonly 14 days)

Use the period given in the question. If none is given, say a reasonable minimum period is required.

Disapplying the right

Special resolution = at least 75% of votes cast

Alternatively the articles of a private company may exclude the right. Ordinary resolution is 'more than 50%'.

Consent test (default rule)

Votes in favour ÷ nominal value of the class ≥ 75%

Used where the articles give no procedure. The alternative is a special resolution at a separate class meeting. Check which one the question states.

Objector threshold

Dissenting holders' shares ÷ issued shares of the class ≥ 15%

Commonly applied model. The objectors must not have consented or voted in favour. Use the percentage given in the question.

Time limit to object

Application to court within 21 days of the consent or resolution

Commonly applied model. A variation under challenge is not effective until the court confirms it.

Variation or not?

Change to the rights themselves = variation; change only to the effect or value of the rights = not a variation

Issuing new equal-ranking shares is usually not a variation.

Court's test

Unfairly prejudicial to the class → court may cancel; otherwise → court confirms

The court looks at the class as a whole, not at one holder's personal interests.

Total nominal value unchanged

Number of shares × nominal value (before) = Number of shares × nominal value (after)

Use this to check any consolidation or subdivision. If the totals differ, you have made an error or it is a reduction or increase.

Consolidation

New shares = Old shares ÷ consolidation ratio; new nominal value = old nominal value × ratio

Fractions can arise if the number of shares is not divisible by the ratio. The company must deal with fractions, for example by selling them or rounding as the resolution provides.

Subdivision

New shares = Old shares × split ratio; new nominal value = old nominal value ÷ ratio

Rights attached to each new share must be proportionate. The proportion of paid-up to unpaid on each new share stays the same.

Redenomination

New nominal value = old nominal value × agreed exchange rate

Rounding can slightly change the total. Law commonly allows the rounding difference to be dealt with through a reserve.

Procedure rule

Check constitution → pass resolution → notify registrar

This is the usual sequence. Say that the power must exist in the law and not be barred by the constitution.

Capital maintenance principle

Share capital must not be returned to members except by a lawful method

The rule that protects creditors in a limited company.

Dividend rule

Dividend only from distributable profits

Paying a dividend from capital breaches maintenance of capital.

Court route to reduction

Special resolution + court confirmation

A special resolution needs at least 75% of votes cast. The court considers creditor protection.

Solvency statement route

Special resolution + directors' solvency statement

Directors state the company can pay its debts now and for the next twelve months. Check which route your syllabus variant applies to private companies.

Typical purposes of reduction

Cancel unrepresented losses, or return surplus capital

Know both reasons and which creditors are affected.

Conditions for a valid buyback or redemption

Shares fully paid + other non-redeemable shares remain + payment on purchase + lawful funding + correct approval

If any one of these fails, the purchase is unlawful. Check each in turn.

Permitted funding

Distributable profits OR proceeds of a fresh share issue (private company: capital only with statutory safeguards)

Profits are the normal source. Capital is an exception for private companies only.

Capital redemption reserve

Transfer to CRR = nominal value of shares bought − fresh issue proceeds used

If funded wholly from profits, transfer the full nominal value. The reserve cannot be distributed.

Market purchase approval

Market purchase = recognised stock exchange + ordinary resolution authority

The authority sets a maximum number of shares, a price range and a time limit.

Off-market purchase approval

Off-market purchase = contract approved by special resolution (seller's votes excluded)

A special resolution needs at least 75% of votes cast. The contract must be available to members before the vote.

Distributable profits

Accumulated realised profits − accumulated realised losses

Both measured to date, not just for the current year. Amounts already distributed or capitalised are excluded.

Public company extra test

Net assets after distribution ≥ called-up share capital + undistributable reserves

Applies in addition to the distributable profits test. A private company does not need to meet it.

Never distributable

Share capital and share premium cannot be paid out as dividends

Only a formal capital reduction or buyback procedure can return capital to members.

Recovery rule

Member liable if they knew, or had reasonable grounds to believe, the distribution was unlawful

Directors who authorised it may also be liable to repay the company.

Quick revision

• Share capital is raised from members and is a fund that creditors can rely on.
• Issued capital is what has been allotted; paid-up is what has actually been paid.
• Preference shares rank ahead for dividends only to the extent the articles say.
• Directors need authority to allot shares, given by the constitution or by the members.
• Pre-emption rights let existing members be offered new shares for cash first, in proportion to their holdings.
• Pre-emption rights can be excluded only in the ways the law and the constitution allow.
• Class rights can be varied only as the constitution or the law provides, usually with class consent.
• Capital must not be returned to members except by lawful routes such as reduction or buyback.
• A reduction of capital needs member approval and, depending on the route, solvency support or court sanction.
• Buybacks must follow set conditions on approval and funding, and must not leave the company insolvent.
• Dividends may be paid only from distributable profits.
• An unlawful distribution can be recoverable from members who knew or should have known it was unlawful.

Common mistakes

• Treating authorised capital as money the company has raised. Fix: Authorised is only a ceiling on shares that may be issued. Money raised relates to issued and paid-up.
• Confusing called-up with paid-up capital. Fix: Called-up is what the company has asked for. Paid-up is what it has received. The difference is called but unpaid.
• Saying directors never need shareholder approval to issue shares. Fix: Remember that the power to allot is limited. Authority comes from the articles or an ordinary resolution.
• Treating a share premium as profit available for dividends. Fix: Share premium is capital. It goes to the share premium account and is protected.
• Applying pre-emption rights to every share issue. Fix: Always check equity and cash. A share-for-asset deal usually falls outside the right.
• Saying an ordinary resolution can disapply the right. Fix: Link disapplication with a special resolution, which needs at least 75% of votes cast.
• Counting votes of all shareholders instead of the affected class. Fix: Use the class's shares only. Ignore other classes unless they are also affected.
• Treating every adverse effect on a class as a variation. Fix: Ask whether the rights themselves changed. Dilution from a new equal-ranking issue is usually not a variation.
• Treating subdivision and consolidation as the same thing Fix: Link the word to the direction. Consolidation joins shares together into fewer. Subdivision divides them into more.
• Saying total share capital changes after a split or consolidation Fix: Always multiply shares by nominal value before and after. The total should match.

Exam tips

• Draw the four-line ladder (authorised, issued, called-up, paid-up) before answering any figures question.
• Watch the words 'always' and 'automatically' in options about preference shares. They are usually the trap.
• Use nominal value for share capital. Put any premium aside.
• Objective questions are all or nothing, so read every option fully before choosing.
• For written answers, state the rule first, then apply it to the facts, then conclude.
• Start every scenario by checking authority, since examiners often hide a missing resolution in the facts.
• Always compare issue price with nominal value before anything else.
• In objective questions, reject options that allow a discount to nominal value.