Raising equity finance

So what is it and how do you go about raising equity finance? Equity financing is a way of raising funds from investors to finance your company and its business. Companies are able to allot or issue new shares, whereby a new or existing shareholder subscribe for additional shares in a company and pay a price for those shares, usually at a premium.

The Companies Act 2006 (the “Act”) contains a number of key considerations which directors should be aware of when allotting new shares in a company. Regardless of whether the shares are to be allotted to one private individual investor, a company set up as an investment vehicle or through crowd funding, there are some basic principles that apply on each allotment:

Directors Authority to Allot Shares

The directors of a company must not allot shares unless they have authority to do so pursuant to section 550 or 551 of the Act. Directors should check the constitution of a company carefully. Should the directors need to be authorised to allot shares they will need the authorisation of the shareholders’ of the company. An authority to allot will need to specify the maximum amount of shares that may be allotted and must specify a duration during which the allotment can take place. Typically, board minutes and a shareholder resolution will be required to document the authority.

Pre Emption Rights

The pre-emption right is a right of first refusal allowing the existing shareholders in a company a chance to maintain their shareholding on a fresh allotment of shares. Pre-emption rights are typically found in the constitution of the company, its articles of association, or a shareholders’ agreement. The statutory pre-emption right is contained in section 561 of the Act. It should be noted that the statutory pre- emption right will apply to an allotment unless it an exception applies, it has been excluded or the current shareholders have waived their rights. Typically, board minutes, a shareholder resolution or a waiver will be required to be drafted.

New Classes of Share

Upon incorporation, the vast majority of private limited companies are set up with ordinary shares. They contain a right to vote, attend meetings, share in any dividend and a right to participate in capital, including on the winding up of a company. If the directors of a company want to allot shares with different rights (such as no right to dividend) they must allot a new class. If new classes of shares are to be created, new articles of association of the company will need to be adopted which document the rights attaching to the new shares.

Persons of Significant Control Register

Certain UK companies must keep a separate register of individuals (PSCs) and certain legal entities (RLEs) with significant control over the company (PSC register). Following the allotment of shares the directors of the company must always consider whether an individual or an RLE who has been allotted the new shares, who is not recorded on the PSC register, is required to be recorded on the PSC register.

The above are a very basic set of guidelines which must be considered when allotting new shares to raise finance. If are you planning to raise finance through an allotment of shares we would be delighted to guide you through the process.

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