Alteration of Share Capital

Definition

Alteration of Share Capital refers to the process through which a company can modify its existing share capital. This can include actions such as increasing or reducing the company’s share capital, consolidating or subdividing shares, and canceling any unissued shares. These actions are generally governed by the company’s articles of association and specific regulations, such as the Companies Act 2006 in the UK.

Examples

Increase of Share Capital: A company may decide to issue additional shares to raise more funds. For instance, a company with a current share capital of £100,000 might issue 10,000 new shares of £1 each, increasing its share capital to £110,000.
Reduction of Share Capital: If a company wishes to return capital to shareholders or write off accumulated losses, it might reduce its share capital. For example, reducing share capital from £200,000 to £150,000 with £50,000 returned to shareholders or adjusted against losses.
Consolidation of Shares: A company may consolidate its existing shares to increase their nominal value. For example, consolidating 100 shares of £1 into 25 shares of £4 each.
Subdivision of Shares: Conversely, a company might subdivide its shares to decrease their nominal value, making them more accessible. For instance, subdividing 100 shares of £1 into 200 shares of 50p each.
Cancellation of Unissued Shares: If a company has authorized but unissued shares that it no longer needs, it can cancel them to streamline its capital structure.

Frequently Asked Questions

1. What is the purpose of altering share capital?

The purpose of altering share capital can range from raising additional capital, returning excess capital to shareholders, restructuring the balance sheet, to complying with regulatory requirements or strategic corporate changes.

2. Can any company alter its share capital?

Most companies have the ability to alter their share capital as per their articles of association and in line with the regulatory framework they’re governed by, such as the Companies Act 2006 in the UK.

3. Does altering share capital require shareholder approval?

Yes, usually a special resolution by the shareholders is required to alter the share capital. Specific procedures and required approvals may vary based on jurisdiction and the company’s governing documents.

4. How does the alteration of share capital affect shareholders?

For shareholders, the impact depends on the nature of the alteration. An increase in share capital could dilute existing holdings, whereas a reduction could increase shareholders’ proportionate interest. Consolidation and subdivision change the nominal value but not the overall worth of their holdings.

5. What are the statutory requirements for reducing share capital?

Reducing share capital typically requires compliance with detailed statutory procedures including court approval or solvency statements and shareholder resolutions, depending on local corporate laws.

Share Capital: The total value of all issued shares of a company, representing the invested capital.
Articles of Association: The document that specifies the regulations for a company’s operations and defines the company’s purpose.
Authorized Share Capital: The maximum amount of share capital that a company is permitted to issue, as specified in the company’s articles of association.
Companies Act 2006: UK legislation that governs company law and affects all companies within its jurisdiction.
Reduction of Capital: A process whereby a company decreases its share capital, under conditions and procedures stipulated by law.

Online References

Suggested Books for Further Studies

Principles of Corporate Finance - Authors: Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Corporate Finance: Theory and Practice - Authors: Aswath Damodaran
Company Law - Authors: Alan Dignam and John Lowry

### What is the primary legislation governing alteration of share capital in the UK? - [x] Companies Act 2006 - [ ] Securities Exchange Act of 1934 - [ ] Sarbanes-Oxley Act of 2002 - [ ] Financial Services Act 2012 > **Explanation:** The Companies Act 2006 is primary legislation that governs company law in the UK, including provisions related to the alteration of share capital. ### Can a company unilaterally increase its share capital without any form of shareholder approval? - [ ] Yes, if the board of directors deems it necessary. - [x] No, shareholder approval is generally required. - [ ] Only with court approval. - [ ] It depends on the company's annual revenue. > **Explanation:** Generally, a company cannot unilaterally increase its share capital without shareholder approval, which is usually obtained through a special resolution at a general meeting. ### What happens to the value of shares when a company consolidates its share capital? - [ ] The value of shares decreases. - [ ] The nominal value of shares remains unchanged. - [x] The nominal value of shares increases. - [ ] The number of shares increases but the overall value remains the same. > **Explanation:** When consolidating share capital, the nominal value per share increases while the number of shares decreases, thus not changing the overall share capital. ### What is a likely reason for a company to reduce its share capital? - [ ] To raise additional funds for expansion. - [x] To return excess capital to shareholders. - [ ] To increase the number of shares in the market. - [ ] To comply with stock market requirements. > **Explanation:** A company may reduce its share capital to return excess capital to shareholders or to restructure its balance sheet by writing off accumulated losses. ### Subdivision of shares is primarily used to: - [ ] Reduce the overall share capital of the company. - [ ] Increase the overall value of the company's shares. - [x] Decrease the nominal value of individual shares. - [ ] Consolidate shareholder equity. > **Explanation:** The subdivision of shares decreases the nominal value of individual shares but does not change the overall share capital. ### What term is used to describe shares that have been authorized but not yet issued? - [ ] Fully paid shares - [ ] Issued shares - [x] Unissued shares - [ ] Convertible shares > **Explanation:** Shares that have been authorized by the company's articles of association but not yet issued to shareholders are known as unissued shares. ### When altering share capital, what governing document of a company typically outlines the procedures and permissions required? - [ ] The company's business plan - [ ] The shareholder agreements - [ ] The company's strategic plan - [x] The articles of association > **Explanation:** The articles of association are the governing documents that typically outline the procedures and permissions required for altering share capital. ### Is the cancellation of unissued shares a way to increase the share capital of a company? - [ ] Yes, it increases available capital for future use. - [x] No, it simply removes shares that were authorized but not issued. - [ ] Yes, it directly increases shareholder equity. - [ ] No, it only affects issued shares. > **Explanation:** Cancellation of unissued shares simply removes shares that were authorized but not issued, and does not increase the share capital of a company. ### Which term describes adjusting the nominal values of issued shares without changing the overall share capital? - [x] Consolidation - [ ] Amortization - [ ] Reconciliation - [ ] Conversion > **Explanation:** Consolidation is the process of adjusting the nominal values of issued shares (typically increasing) without changing the overall share capital. ### What approval is generally required from shareholders to alter a company’s share capital? - [ ] Simple majority vote - [x] Special resolution - [ ] Ordinary resolution - [ ] Unanimous consent > **Explanation:** A special resolution, which usually requires a more substantial majority (such as 75%) in favor, is generally required from shareholders to alter a company’s share capital.

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