PastPaperHero | Business finance - Allotment and transfer of shares

Learning Outcomes

This article outlines the legal framework, statutory procedures, and SQE1 exam issues concerning share allotment, transfer, buybacks, and capital maintenance, including:

How directors obtain and use authority to allot shares, the effect of ss. 550–551 CA 2006, and the consequences of acting without authority
The scope of statutory pre-emption rights on cash equity issues, when they apply, and the main routes for exclusion or disapplication by articles or special resolution
The step-by-step mechanics of a valid share transfer, directors’ discretion to refuse registration, and calculation and payment of stamp duty
Core rules governing share buybacks, sources of funding (profits, fresh issue, or capital), required resolutions, solvency statements, and Companies House filings
The capital maintenance principle, how it constrains allotments, transfers, buybacks, and dividends, and the limited statutory routes for returning capital to shareholders
The distinction between allotment and issue of shares, associated timing, administrative steps, and key filing and record-keeping obligations
Directors’ general duties when exercising allotment and buyback powers, particularly the proper purpose rule and risks of using share issues to alter voting control
Public company-specific requirements on non-cash consideration, independent valuation of assets, and restrictions on using services as consideration for shares
Application-focused analysis of common SQE1-style problem scenarios, highlighting the correct statutory processes, necessary approvals, and typical pitfalls that examiners test.

SQE1 Syllabus

For SQE1, you are required to understand the legal framework and procedures for allotting and transferring shares in private and public companies, with a focus on the following syllabus points:

the authority required for directors to allot shares and the relevant Companies Act 2006 provisions
the operation and disapplication of statutory pre-emption rights
the process and restrictions for transferring shares, including directors’ discretion and stamp duty
the legal requirements and procedures for share buybacks, including funding and approvals
the principle of capital maintenance and its impact on share transactions
the distinction between allotment and issue of shares, and associated filing deadlines and documents (e.g. return of allotment)
directors’ duty to exercise allotment powers for a proper purpose (including risks of using allotments to alter voting control)
additional public company rules for payment in kind and independent valuation of non-cash consideration

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

What statutory authority must directors have to allot new shares in a private company with more than one class of shares?
What are statutory pre-emption rights, and when do they apply to a share allotment?
What is the usual process for transferring shares in a private company, and what role do the directors play?
How can a private company lawfully buy back its own shares, and what are the funding options?
What is the principle of capital maintenance, and why is it relevant to share allotments and buybacks?

Introduction

The allotment and transfer of shares are central to company finance and ownership. For SQE1, you must know the statutory rules and procedures that govern how new shares are issued, how existing shares are transferred, and how companies can buy back their own shares. These processes affect control, capital structure, and the rights of shareholders. It is important to appreciate the practical differences between “allotment” and “issue” of shares, the timelines and filings that accompany each, and how the allotment power interacts with directors’ duties, especially where control might be affected.

Authority to Allot Shares

Before a company can issue new shares, the directors must have the proper authority. The Companies Act 2006 sets out the requirements for directors’ authority to allot shares.

Key Term: authority to allot shares
The legal power given to directors to issue new shares, either by the company’s articles or by an ordinary resolution of the shareholders.

In a private company with only one class of shares, directors usually have automatic authority to allot shares unless the articles restrict them. In companies with more than one class of shares or in public companies, directors need express authority, either in the articles or by an ordinary resolution of the shareholders (s. 551 CA 2006). The authority must specify the maximum amount of shares and the period (not exceeding five years).

Where an allotment is made without the required authority, the allotment itself remains valid, but any director who knowingly authorised or permitted the unlawful allotment commits an offence (either-way) (s. 549 CA 2006). In practice:

private companies with one class rely on s. 550 unless the articles limit that power
all other companies require a s. 551 authorisation by the articles or an ordinary resolution stating the maximum amount and duration (up to five years), which can be renewed
certain resolutions (including s. 551 authorisations) must be filed at Companies House (ss. 29–30 CA 2006)
a return of allotment must be filed (see below on filing)

Allotting new shares also engages directors’ general duties. An allotment used primarily to manipulate voting control can breach the duty to exercise powers for a proper purpose (s. 171(b) CA 2006). The primary purpose of allotment should be raising capital, not changing who controls the company.

Key Term: allotment vs issue
Allotment occurs when a person acquires the unconditional right to be entered in the register of members for the shares (s. 558 CA 2006). Issue occurs when the person’s name is actually entered in the register of members. Issue follows allotment.

Key post-allotment administration:

update the register of members within two months
issue share certificates within two months
file a return of allotment (Form SH01) with a statement of capital within one month (s. 555 CA 2006)

Worked Example 1.1

A private company with two classes of shares wants to issue new ordinary shares. The articles are silent on allotment. What must the directors do?

Answer:
The directors must obtain authority from the shareholders by passing an ordinary resolution specifying the maximum number of shares and the period of authority.

Worked Example 1.2

A board is considering an allotment to a friendly investor that would reduce a large minority’s voting power. Is this safe?

Answer:
It may breach the duty to exercise powers for a proper purpose (s. 171(b)). The primary purpose of an allotment should be raising capital, not altering voting control. An allotment used chiefly to dilute the minority can be challenged.

Statutory Pre-emption Rights

When a company proposes to allot new equity shares for cash, existing shareholders have statutory pre-emption rights under the Companies Act 2006.

Key Term: pre-emption rights
The right of existing shareholders to be offered new shares first, in proportion to their existing holdings, before the shares are offered to others.

These rights apply to ordinary shares issued for cash (s. 561 CA 2006). The company must offer the shares to existing shareholders on the same or more favourable terms, giving at least 14 days to accept (s. 562). Pre-emption rights can be disapplied by a special resolution or by a provision in the articles.

Key Term: equity securities
Ordinary shares or rights to subscribe for, or convert into, ordinary shares.

Important mechanics and exceptions:

the offer must be proportionate to existing holdings and open for at least 14 days (s. 562(4)–(5))
pre-emption does not apply to bonus shares (s. 564), allotments wholly or partly for non-cash consideration (s. 565), or shares under employee share schemes (s. 566)
articles may exclude or modify statutory pre-emption (s. 567–568)
disapplication can be by special resolution:
- s. 569 for private companies with only one class of shares
- s. 570 where a general s. 551 authority exists
- s. 571 disapplication for a specific allotment, supported by a directors’ statement explaining the reasons and the amount payable; knowingly or recklessly misleading statements can attract liability (s. 572)

Best practice for disapplication (particularly in larger companies) follows the Pre-Emption Group’s Statement of Principles, including limiting the amount of equity covered and providing transparent explanations.

Worked Example 1.3

A company with 10,000 ordinary shares wants to issue 2,000 new shares for cash. What must it do if pre-emption rights apply?

Answer:
The company must offer each shareholder the right to buy a proportion of the new shares (e.g., a 10% shareholder can buy 200 shares) before offering them to outsiders, and allow at least 14 days to accept.

Worked Example 1.4

The board wants to allot shares for a non-cash consideration (an office building). Do statutory pre-emption rights apply?

Answer:
No. Statutory pre-emption rights apply to equity securities allotted for cash. Where consideration is wholly or partly non-cash, s. 565 disapplies statutory pre-emption.

Payment and Valuation for New Shares

Shares must not be issued at a discount to their nominal value (s. 580 CA 2006). Payment can be in cash or in assets of a verifiable value. If non-cash consideration is used, an independent valuation may be required, especially for public companies.

Key Term: nominal value
The face value of a share as set out in the company’s constitution, not necessarily its market value.

Key points:

“money or money’s worth” can be accepted (s. 582), including property or services in private companies
the excess paid over nominal value is credited to the share premium account, which is generally not distributable (s. 610)
public companies cannot accept services as consideration for shares (s. 585) and must obtain an independent valuation report by a suitably qualified person (e.g., auditor-eligible) for non-cash consideration (s. 593)
courts are slow to second-guess genuine valuations for private companies, but clearly illusory or colourable consideration can be challenged

Payment in kind quickly raises capital maintenance and fairness questions. Directors must ensure any non-cash consideration matches the amount to be paid up on the shares and complies with public company valuation rules where applicable.

Transferring shares means an existing shareholder sells or gifts their shares to another person. The process is governed by the Companies Act 2006 and the company’s articles.

Key Term: share transfer
The process by which ownership of existing shares passes from one person to another, usually by a stock transfer form.

The usual steps are:

the transferor and transferee complete a stock transfer form
if the consideration exceeds £1,000, stamp duty at 0.5% (rounded up to the nearest £5) is paid on the form; gifts and transfers under £1,000 are generally exempt, although an exemption certificate may be required on the form
the form and share certificate are sent to the company
the directors decide whether to register the transfer (they may have discretion under the articles)
if approved, the transferee is entered in the register of members and issued a new share certificate

Registration and certificates should be completed within two months. If directors refuse registration, the company must notify the transferee promptly and give reasons (s. 771 CA 2006). Until registration, legal title remains with the transferor (who must act as bare trustee for the transferee), while beneficial ownership passes to the transferee.

Key Term: directors’ discretion on transfers
The power of directors, often set out in the articles, to refuse to register a share transfer, usually to protect the company’s ownership structure.

Transmission (transfer by operation of law) occurs on death or bankruptcy, with the company recognising personal representatives or trustees in bankruptcy under the articles (commonly MA 27). These representatives may register as members or sell the shares.

Worked Example 1.5

A transferee pays £20,000 for shares. What stamp duty is payable and when?

Answer:
Stamp duty of 0.5% on the consideration, rounded up to the nearest £5, is payable on the stock transfer form. On £20,000, this is £100, payable within 30 days of execution, and the stamped form must be submitted to the company for registration.

Worked Example 1.6

A shareholder in a private company wants to transfer shares to an outsider. The articles give directors absolute discretion to refuse transfers. What can happen?

Answer:
The directors can refuse to register the transfer for any reason, provided they act in good faith for the benefit of the company and follow the articles. They must notify the transferee promptly and give reasons for refusal.

Private companies often restrict share transfers to keep control within a chosen group. Common restrictions include:

directors’ approval required for any transfer
pre-emption rights on transfers (shares must be offered to other shareholders first)
prohibitions on transfers to competitors or non-family members

These restrictions must be set out in the articles to be effective. The articles cannot stop a transferor selling or gifting shares as a matter of property law, but they can control entry to the register of members. Any refusal should be exercised bona fide for the benefit of the company (and in accordance with s. 172 CA 2006), with reasons given under s. 771.

A company may buy back its own shares in certain circumstances, subject to strict statutory procedures.

Key Term: share buyback
The purchase by a company of its own shares from shareholders, reducing the number of shares in issue.

Key Term: buyback from profits
A share buyback funded from the company’s distributable profits or the proceeds of a new share issue.

Key Term: buyback from capital
A share buyback funded from the company’s capital, allowed for private companies if strict procedures are followed.

Buybacks can be funded from distributable profits, the proceeds of a fresh issue of shares, or, for private companies, in some cases from capital.

Key Term: buyback from profits
A share buyback funded from the company’s distributable profits or the proceeds of a new share issue.

Key Term: buyback from capital
A share buyback funded from the company’s capital, allowed for private companies if strict procedures are followed.

To buy back shares, the company must:

check the articles allow buybacks (Part 18 CA 2006 governs; articles may restrict)
enter into a buyback contract, approved by an ordinary resolution of shareholders (s. 694); the seller’s votes do not count, and the contract must be available for inspection for 15 days before the meeting (or circulated with a written resolution)
ensure the shares are fully paid (s. 691)
fund the buyback from profits, a fresh issue, or, if from capital, follow the additional procedure (including a directors’ solvency statement, auditor’s report, and special resolution)
file the required forms and update the register of members

When buying back out of distributable profits or proceeds of a fresh issue:

approve the contract by ordinary resolution
complete the purchase; shares are generally cancelled (private companies cannot hold shares in treasury)
file a return of purchase and notice of cancellation (including a statement of capital) within 28 days
keep the buyback contract available for inspection for 10 years (s. 702)

Private companies may fund a buyback out of capital if profits are insufficient (ss. 709–723). This requires:

directors’ solvency statement confirming the company can pay its debts as they fall due and will remain solvent for the next 12 months (s. 714), supported by an auditor’s report
special resolution approving the payment out of capital (s. 716), passed within seven days of the solvency statement
public notice: within a week, publish a notice in the Gazette and notify each creditor or publish in a national newspaper (s. 719)
a creditor/shareholder objection window; the purchase can proceed 5–7 weeks after the special resolution (s. 723), allowing time for court applications

A small de minimis buyback in cash (within the statutory thresholds) may be available to private companies in limited circumstances. Always confirm current thresholds and conditions.

Worked Example 1.7

A private company buys back shares under a contract approved by ordinary resolution and intends to fund from capital. What additional steps are required?

Answer:
The directors must make a solvency statement (with an auditor’s report). A special resolution approving payment out of capital must be passed within seven days of the solvency statement. Within a week, notice must be placed in the Gazette and either a national newspaper or written notices sent to creditors. The purchase can proceed 5–7 weeks after the special resolution if no successful court challenge is made.

Worked Example 1.8

A private company wants to buy back 1,000 shares from a retiring shareholder. It has sufficient distributable profits. What approvals are needed?

Answer:
The company must enter into a buyback contract, have it approved by an ordinary resolution of shareholders, and fund the buyback from profits. The shares must be fully paid.

Capital Maintenance

The law requires that a company’s share capital is maintained and not returned to shareholders except as permitted by statute.

Key Term: capital maintenance
The principle that a company must preserve its share capital for the benefit of creditors and cannot return capital to shareholders except as allowed by law.

This principle underpins the rules on share allotment, transfer, and buybacks. Shares cannot be issued at a discount, and buybacks are only allowed in specific circumstances to protect creditors. Distributions (including dividends) must be made only out of distributable profits (s. 830 CA 2006). Returning capital directly requires statutory routes such as:

buybacks (Part 18) complying with funding rules and creditor protections
redemption of redeemable shares (ss. 684–692), funded in the same way as buybacks
reduction of capital by special resolution supported by a solvency statement (ss. 641–644) or by court approval
schemes of arrangement (ss. 895–901) where appropriate

Public companies must comply with additional capital maintenance safeguards, including restrictions on financial assistance and more stringent payment-in-kind rules.

Exam Warning

The procedures for share allotment, transfer, and buybacks are highly technical. Failing to follow the correct process can result in invalid transactions or personal liability for directors. Always check the company’s articles and the relevant statutory requirements. For allotments, ensure the board has authority (s. 550 or s. 551), consider pre-emption (ss. 561–572), and file SH01 within one month. For transfers, consider stamp duty and director discretion; reasons must be given if registration is refused. For buybacks, ensure the contract is approved by ordinary resolution, that shares are fully paid, and follow the capital route strictly if profits are insufficient. Misuse of allotments to alter voting control can breach the proper purpose duty.

Revision Tip

For SQE1, focus on the statutory steps for each process: authority to allot, pre-emption rights, transfer procedures, and buyback approvals. Practice applying these steps to short scenarios. Remember the distinction between allotment and issue, timing and filing requirements, and the availability and limits of disapplications and exceptions.

Key Point Checklist

This article has covered the following key knowledge points:

Directors must have authority to allot shares, either from the articles or by ordinary resolution; s. 550 applies in private one-class companies, s. 551 in others.
Allotment occurs before issue; issue happens when the shareholder’s name is entered in the register; file SH01 within one month and issue certificates within two months.
Statutory pre-emption rights protect existing shareholders when new shares are issued for cash; offers must be proportionate and open for at least 14 days.
Pre-emption can be excluded or disapplied by articles or special resolution; there are statutory exceptions (bonus shares, non-cash consideration, employee schemes).
Shares must not be issued at a discount to nominal value; payment may be cash or money’s worth (with stricter rules for public companies and independent valuation of non-cash consideration).
Share transfers require a stock transfer form, possible stamp duty, and directors’ approval if the articles allow. If refused, reasons must be provided, and legal title remains with the transferor until registration.
Private companies can restrict share transfers in their articles (e.g., director approval, pre-emption on transfers), but refusals must be bona fide for the company’s benefit.
Share buybacks require a buyback contract approved by ordinary resolution; shares must be fully paid; fund from profits or a fresh issue; capital route demands solvency statement, auditor’s report, special resolution, notices, and timing safeguards.
The principle of capital maintenance limits how and when capital can be returned to shareholders; dividends must be paid only from distributable profits, and reductions of capital require statutory routes.
Directors must exercise the allotment power for a proper purpose; using allotments chiefly to change control can breach s. 171(b).

Key Terms and Concepts

authority to allot shares
pre-emption rights
equity securities
nominal value
share transfer
directors’ discretion on transfers
share buyback
buyback from profits
buyback from capital
capital maintenance
allotment vs issue

Business finance - Allotment and transfer of shares