Each individual who has at least one share in a limited company automatically becomes a member or shareholder of it. Members are required to pay for the company shares in cash or by exchanging non-cash sources, for instance offering services to the firm.
Typically, you’re required to pay for the shares as soon as they’re issued, however, a few companies allow you to pay after some date or partly pay for the shares.
Each company has a par or nominal value for its shares indicating their minimum price. As described in the 2006 Companies Act Section 580, companies are not allowed to issue their shares at a discounted rate; hence, the par value can be considered as the minimum amount members need to pay for the shares.
The par value is decided by the company. In a number of private firms, it’s likely to be set at £1, even though you may sometimes see a par value of £100 or even £0.01. Shares may also be issued in currency from other countries. Firms are only allowed to issue shares at a single par value & currency for each share class they issue.
If a company is limited by shares, the par value indicates the extent of a shareholder’s liability in regard to covering a company’s debts. This means that members are only accountable for the debts as long as the par value of the shares isn’t reached. It’s also called ‘limited liability’ and is among the biggest reasons for choosing a limited firm.
You must remember that the above rule does not apply to unlimited companies as the liability of members is unlimited in these companies.
Understanding the market value of the shares
The market value of the shares may or may not be identical to the par value. If the nominal value is less than the market value, the difference between the two is called a share premium.
If a company issues new shares after its formation, or a current member wants to sell their shares, the present company value needs to be ascertained in order to determine the market value. Hence, the premium that new shareholders must pay. For instance:
Let’s say a company issues ten shares in total at the time of its registration.
These shares will have a par value of £1 per share.
365 days later, if the company is valued at £60,000, the market value of each share will be £6,000.
If the company wants to add new members by selling current shares or granting new ones, the amount payable by the new shareholder can be based on the present market rate of £6,000 per share.
If a share is transferred or distributed at £6,000, the nominal value will still be £1, however, it will have a share premium of £5,999.
Paying for your shares
The model articles of your company will determine when you must pay for the shares. Based on the clauses included in the members’ agreement or articles, members may have to pay for shares in the instances below:
- During registration
- Upon transfer/allotment after registration
- At a designated or general date in the coming days
- When the company director(s) issue a ‘call’ on company shares, possibly in case the company experiences a financial crisis
- During the termination of a company
Transferring shares of your company
Many companies in the limited sector are formed based on model articles. The articles state that, except in case of shares issued at the establishment, new shares need to be entirely paid as soon as they are issued.
In some situations, shareholders might be exempted from paying for the shares including:
- When a company issues its shares as part of ‘bonus issue’ or under an employee share scheme
- When members receive completely paid shares in the form of gifts
In the situations above, there may be tax implications for both the shareholders as well as the company.
In addition, if the model articles of a company do not demand instant payment on allocation or no payment calls are ever made, members are allowed to pay for the shares at a later date.
Understanding partly-paid and unpaid shares
If a small amount of the nominal price (along with premium) of the shares is paid, they are known as ‘partly-paid’ shares. If a member receives company shares but is unable to pay the essential nominal amount (along with premium), the shares will be deemed as ‘unpaid’.
Shareholders having partly-paid or unpaid shares stay accountable to the corporation for the sum that is still unpaid. Certain companies will not be able to issue either partly-paid or unpaid shares, or both; the model articles of the company will whether this is allowable. For instance, companies following model articles guidelines that are limited by shares will not be able to issue shares except when they’re completely paid for (nonetheless they will be able to do so for shares distributed at the time of establishment).
The company is free to ‘call’ its shares in the future. This is when the company director(s) send a call notification to the members stipulating the need to pay the corporation a set amount of cash. This can be some or the entire unpaid amount, subject to the shares they own.
Within the call notification, members can also find their call payment date. If a shareholder is unable to pay within the given time, company directors may send him/her a notice.
Consequently, a ‘forfeiture notification’ can be sent to company shareholders in the event payment stays outstanding. Plus, interest can also be incurred for the time the dues remain unpaid. If a person is unable to pay following a forfeiture notification, he/she is likely to lose entitlement to their shares.
Company directors must consult the model articles of the company in addition to passing a resolution during the meeting of board directors before issuing a call notification to shareholders. The resolution must include the call amount details as well as the due date of payment. After the payment is received, a new certificate must be issued, and the members’ register must be updated accordingly. Lastly, the share capital of the company is required to be renewed on the upcoming confirmation statement.
Are the rights of the shareholders affected by partly paid or unpaid shares?
The answer is no. The rights of shareholders are usually unaffected irrespective of the status of the shares, with the only condition being that there hasn’t been any failure in replying to a forfeiture notification after a call warning. Shareholders should have no trouble in exercising any of their rights in the company including dividend, distribution, and voting rights.
Members are free to transfer partly-paid or unpaid shares, as long as the shareholders’ agreement along with model articles permit it, and provided that the new shareholder(s) allow the continuous liability for paying for shares when a call notification is issued by the firm.
As a component of the share transfer procedure, you need to fill out a J-10 stock form and get associated parties to sign it (as opposed to form J-30 which is required each time the shares are entirely paid).
Why would any firm allow delayed payment of its shares?
A company may allow its members to pay for its shares at a future date for a number of reasons. Some of these are given below:
- The business is yet to open a business bank account for receiving the payments.
- To offer greater convenience and adaptability – a potential financier or business associate might be unable to make an immediate payment but agrees to pay after some time.
- A company has already set-up a pre-planned schedule for the payment of the shares, allowing the shareholder to pay in multiple instalments.
- As one of the business strategies – possibly for implementing an acquisition or merger.
- To make sure the company is able to forfeit issued shares, whenever required.
Is it necessary to pay in cash if you want to purchase any shares?
When you make a payment for any shares, it’s known as a ‘consideration’. The majority of the shares are paid for in cash; nevertheless, a company may also issue shares to exchange considerations other than cash, which includes properties, services, assets, shares in another limited firm, debt discharge, etc.
As per the 2006 Companies Act, Section 583, cash consideration can be defined as:
- The cash a company receives.
- A cheque a company receives in good faith that company directors should have no reason to believe won’t be paid.
- A liability release of a firm for a liquidated amount.
- An attempt to pay money to a firm at a later date.
- Payment through any other methods allowing for current or future entitlement to payments, or credits that are equal to payment, in the form of cash.
- More often than not, shareholders are likely to make their payment in cash by transferring the par value (along with share premium, whenever applicable) to the business account of a company.
Viewing shares that are unpaid
If shares have an unpaid status, this should be displayed on statutory records of members and share certificates. Besides, it is necessary to record unpaid shares on your capital statement that must be completed when:
- your business is listed at Companies House
- you file a confirmation statement
- a new portion of shares is allocated
- there is a decline in the share capital of a company
- share prices rise or decline
- there is a division or split up of shares
- changing your company shares
- the status of partly-paid or unpaid shares becomes paid
Company directors are accountable for ensuring that share capital, irrespective of whether it is paid, unpaid, or partly-paid, is displayed on the company’s balance sheet when filing the annual accounts.