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The rule against issuing shares at a discount

Group Reorganisations

19 May 2014

This article is taken from the fifth postcard in our series of cards on group reorganisations, and looks at the rule against issuing shares at a discount.

Links to the other postcards in the series can be found at the end of this article.

Issue5_front

A company’s shares must not be issued at a discount – in other words, for consideration which is less than their nominal value. This also applies to the exercise price payable under share options, and when the issue price is calculated using a formula of some kind.

When a private UK company issues shares for non-cash consideration, there is no statutory requirement for the directors to obtain a formal valuation. But they must consider the value of the non-cash assets, and make sure that this is at least equal to the nominal value of the shares being issued. Often, shares are issued with a relatively low nominal value, with the balance of the consideration allocated to premium. This creates a margin for error – reassuring if the non-cash assets are difficult to value precisely.

This rule against issuing shares at a discount does not mean that the consideration needs to be paid on issue. A private company can issue shares nil or partly paid, and then call for the balance of the issue price to be paid at a later date. Special rules apply to PLCs. In general, PLC shares must be paid up on issue – as to at least 25% of the nominal value, and as to the whole of any premium. Any non-cash consideration for the issue of shares in a PLC must be the subject of an independent valuation report. There are some exceptions to this, however, such as share-for-share exchange arrangements.

Read the other postcards in this series:

Issue 1: Does the plan work for everyone?

Issue 2: What's it worth to you?

Issue 3: How should we balance risk against cost?

Issue 4: Can we release our assets?

Issue 5: Are people getting something for nothing?

Article by
Paul Sutton
LCN Legal Co-Founder

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