Offering shares is one of the most significant activities in the running of a private limited company when it is required to mobilise capital, secure investors or incentivise employees. It possible therefore to state that any business person should have enough knowledge about share issuance process as well as its consequence. This blog will explain you all the ways, essentials and things you should consider while you issue shares in private limited company.
What Are Shares?
Equity is the ownership interest of an individual in an organization. In this case, when a person is facing share, he is actually buying part of that corporate organization. To a certain extent, shareholders take made some profits conversing from the company’s profits on the grounds of dividends and so they possess the right to vote on decisions taking within the context of the company. Knowledge about the nature of shares is crucial while trying to comprehend what the structural nature of the ownership in the company needs to look like.
1. Ordinary Shares: These are the general kind of shares which investors can acquire. Ordinary shareholders may exercise voting rights and may receive dividend but these are not fixed. They are normally considered a riskier investment because dividends depend on the company’s performance. This type of share is suitable to those investors who wish to participate in company management and particularly in some strategic plans.
2. Preference Shares: These shares often have no voting rights and are ranked higher in claim than ordinary shares. It is preferred that preference shareholders are paid dividends before the ordinary shareholders, thus making them a safer investment for everyone’s desire for fixed income. Such shares are usually floated by firms desirous of getting investors who seek lower risks more especially where profit margins are difficult to predict Feasible.
3. Non-Voting Shares: These shares offer no voting rights; this mean that, companies are able to get funds without compromising their authority. It may be very helpful in the situation when the founder wishes to keep control and bring in investment at the same time. As to the voting structure, non-voting shares may be preferred by those investors who do not care much for voting as they are more interested in money to be earned.
4. Convertible Shares: These are bonds that are very close to ordinary shares in that the bondholders are allowed to exchange the bonds for a specific number of the ordinary shares at a future date. This type of share can entice investors who coveted fixed cash flows in the beginning but who are willing to wait for the equity kicker later.
The Legal Provisions Related to Issuing of Shares
Company Constitution
Before deciding to issue shares, ensure that your incorporating memorandum (articles of association) is well understood. These rules cover the circumstance relating to the issuing of shares; the quantity of shares to be issued and special privileges if any that would be accorded to such shares. It is therefore important to ensure that all these internal regulations are meet to clear any legal loop holes or issues with the shareholders. Any alteration to the constitution might just call for a special resolution and this must be well articulated.
Legal Compliance
1. Company Registration: Register your company in the right way and as per the requirement of the country in which your company is to be located. This sometime requires filling of vital documents and charges to the rightful departments and agencies. Getting registration right helps to mitigate risks to your business while safeguarding your investors at the same time. Business people should always endeavor to follow new laws that may be promulgated whenever the existed ones are reviewed.
2. Shareholder Approval: Isuance of new share may require shareholders’ approval depending on your company constitution and laws of the country where it operates
3. Regulatory Bodies: Under the corporate laws of some countries it is necessary to receive permission from the certain state authorities, for instance, securities commissions, before distributing shares. This checks the legal requirement and apart from ensuring that the issuance is legal, it also safeguards investors. Find out the specific regulatory requirement in your territory so that you don’t fall prey to penalties.
Steps to Issue Shares
The last forms of securities that can be issued once you have understood the legal requirements and obtained the necessary approvals is shares.
Determine how many shares you want to float on the market at what price? This decision should also depend on your company’s financial requirement and its viability over a long-term business period. One may want to seek advice from an analyst in order to determine the right share price with respect to the value of the company. Staying between diluting the ownership and the requirement of capital is important, as floating more shares may cut the stakes from existing investors.
Prepare all the documents that it is necessary for the issuance of shares. This typically includes:
• Board Resolution: A capital decision reached at the board of directors level to approve issuance of the shares. This document is prepared to give the historical background of the board’s approval and its basis. It can also contain information on intention to use funds which were got from share issuance.
• Share Subscription Agreement: Letters of share purchase between the company and the new shareholders explaining in details the agreement made during share purchase. This includes sharing of the companies’ functions and responsibilities with respect to dividend and any special privileges pertaining to the share privileges of the share. Availability of clear terms can assist in avoiding hostility and misunderstanding at some time in the future.
• Share Certificate: A legal paper that proves ownership of stock and needs to be issued to shareholders that own stocks. This certificate however is something that is tangible, it is needed in every record of ownership. The other advantage of share issue is that it serves to legitimate the share ownership process through the issue of share certificates.
Keep a more current share register which is a document held by the company that lists all the shareholders alongside their shareholding. It is also legal to do so and is vital for the management of shareholder rights and their obligations. A share register that is accurate assists to eliminate the problem and also insures that universally acceptable legislation has been followed
After shares have been issued, then new share certificates should be issued to the shareholders. These certificates carry the ownership evidence and should contain features such as the name of the shareholder, an amount, and a class of share. Effective organization of this paperwork improves the level of integrity and confidence with shareholders
Sometimes, depending on the country where you are operating from, you have to inform some authorities about the shares issuance. The failure to meet these requirement not only have an adverse effect to the company but also strengthens their credibility to the investors. Time-bound issues can be resolved in order to avoid complications in connection with non-compliance with certain regulations to the authorities and thereby maintain a clean record.
If you intend to tap the funds by public or going for a public issue, it is quite appropriate to go for shares issue. This process may involve preparing a prospectus for the business giving information on business plan, its performance and risks.
Whe we issue shares and certificates forming part of a share capital, make sure that all paper works are complete and properly documented. One of the process can be that there is certain forms that have to be filled with some authorities as evidence that they have issued and they have up dated it.
Conclusion
In essence, share issuance is easy, legal and needs, scrutiny and dealing with new arising issues. Committing the needed time and effort into this process will help improve your company’s growth prospects, while at the same retaining shareholder equity efficiently. That is not to say that enhancement of share issuance is all about the present gains; it is all about the start towards the creation of a strong foundation for future growth and development of a robust and sustainable business model.
