The rule against issuing shares at a discount

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.

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?