Every person who takes one or more shares in a company will become a shareholder (aka a ‘member’) of that company. Shareholders must pay for their company shares in the form of cash or in exchange for non-cash consideration, such as providing services to the company.
Paying for company shares normally takes place when the shares are issued, but some companies allow members to partly pay or pay at a later date.
The nominal value of shares
Company shares have a nominal (or par) value, which represents their minimum worth. As prescribed by Section 580 of the Companies Act 2006, a company may not issue shares at a discount; therefore, the nominal value is the minimum sum that members must pay for company shares.
The nominal value of the shares is determined by the company. In most private companies, the nominal value of a share is £1, although it is possible to have a nominal value of £0.01 or even £100. The nominal value can also be expressed in a different currency. Companies can only issue shares at one nominal value and currency for every class of shares they issue.
Furthermore, for companies that are limited by shares, the nominal value of a share represents the extent of a shareholder’s liability to cover the debts of the company. This means that shareholders are only responsible for the company’s debts up to the nominal value of their shares.
This concept is known as ‘limited liability’ and is one of the many advantages of running a business as a limited company. You should note, this does not apply to unlimited companies, where the liability of the shareholders is unlimited.
The market value of company shares
Shares also have a market value, which may or may not be the same as the nominal value. When the market value is greater than the nominal value, the difference is known as the share premium.
If new shares are issued after a company has been set up, or an existing member wishes to sell his or her shares, the current value of the business should be ascertained to determine the market value of them. Thus, the premium payable by the new shareholder. For example:
- A company issues 10 shares when it is registered at Companies House.
- These shares are assigned a nominal value of £1 each
- One year later, the company is valued at £50,000. Each of the 10 shares now has a market value of £5,000
- If the company wishes to bring in new members by selling existing shares or allotting new ones, the price payable by the new shareholder will be negotiated around the current market value of £5,000 per share
- If a share is issued or transferred at £5,000, it will still have a nominal value of £1, but the share premium will be £4,999
When do I have to pay for my shares?
A company’s articles of association (and shareholders’ agreement, if one is in place) will state when shares have to be paid. Depending on the provisions set out in the articles or shareholders’ agreement, shareholders may be required to pay for their shares at the following stages:
- During incorporation
- Upon allotment or transfer after incorporation
- At a specified or unspecified date in the future
- When the director issues a ‘call’ on shares, i.e. payment demand, perhaps if the company is facing financial difficulty
- When the company is wound up
Most companies are formed using the model articles for private companies limited by shares. These articles provide that, except for shares issued at incorporation, all new shares must be fully paid up when they are issued.
In a few limited scenarios, shareholders may not have to pay for their shares. For example:
- when the shares are issued as part of an employee share scheme
- when the shares are issued as part of a ‘bonus issue’
- and when fully paid shares are gifted or inherited.
In such circumstances, there may be tax implications for both the company and shareholders.
Shareholders may also find they never have to pay for the shares if a company’s articles do not demand immediate payment on issue, and no ‘calls’ for payment are ever made (we discuss ‘calls’ on shares in the next section).
What are unpaid and partly-paid shares?
If a member receives company shares but does not pay any of the required nominal value (and premium) to the company, they are ‘unpaid’. If some of the nominal value (and premium) of the shares is paid to the company, those shares are ‘partly paid’.
Shareholders with unpaid or partly-paid shares remain liable to the company for the amount they have not yet paid. Not all companies can issue unpaid or partly paid shares – the company’s articles of association will state whether this is permissible. For example, companies that have adopted the model articles for private companies limited by shares cannot issue shares unless they are fully paid for (although they can do so for shares taken up on incorporation).
The company may make a ‘call’ on shares at a later date. A call on shares is when the directors send a ‘call notice’ to shareholders stipulating their requirement to pay the company a specified sum of money, which may be some or all of the unpaid amount, in respect of any shares they hold.
The call notice will state the payment deadline (or ‘call payment date’). Should a shareholder fail to make the payment within the specified timeframe, the directors should send a reminder.
Subsequently, a ‘forfeiture notice’ may be sent to the shareholders if payment remains outstanding. Interest on the call payment will usually be applied until the debt is settled. Following a forfeiture notice, failure to pay will likely result in the shareholder losing entitlement to the shares.
Issuing a call on shares requires the directors to consult the company’s articles of association and pass a resolution at a board meeting. The resolution should include details of the call amount and payment due date. Once payments have been received, new share certificates should be issued, the register of members should be updated accordingly, and the company’s share capital should be updated on the next confirmation statement.
Do unpaid or partly-paid shares impact the rights of a shareholder?
Whether or not the status of company shares is paid, partly paid, or unpaid, the shareholder rights are unaffected – provided there has been no failure to respond to a forfeiture notice following a call notice. The shareholder will still be entitled to the prescribed particulars attached to the particular share class, such as voting rights, dividend rights, and distribution rights.
Furthermore, members retain the right to transfer unpaid or partly-paid shares, provided the articles of association and shareholders’ agreement allow it, and on the condition the new shareholder accepts the ongoing liability to pay for the shares when the company issues a call notice.
As part of the share transfer process, a J10 stock transfer form should be completed and signed by the relevant parties (as opposed to form J30, which is used when the shares are fully paid).
Why would a company allow shares to be paid at a later date?
There are a number of reasons why a company would allow members to pay for their shares at a later date, rather than demanding that shares are paid in full upon allotment or transfer. For example:
- The company has not yet set up a business bank account to receive payments
- It allows for greater flexibility and convenience – a potential investor or business partner may be unable to pay immediately, but agrees to pay at a later date
- A pre-planned payment schedule has been set up, enabling a shareholder to pay for shares in instalments
- As part of a business strategy – perhaps to implement a merger or acquisition
- To ensure the company can forfeit issued shares, if required
Do shares require being paid for in cash?
A payment for shares is referred to as a ‘consideration’. Most shares are paid for in cash; however, it is possible for a company to issue shares in exchange for non-cash consideration (or ‘money’s worth’), including services, property, assets, shares in another limited company, goodwill, know-how, or discharge of a debt.
As outlined in Section 583 of the Companies Act 2006, a cash consideration is:
- Cash received by the company
- A cheque received by the company in good faith that the directors have no reason to suspect will not be paid
- A release of a liability of the company for a liquidated sum
- An undertaking to pay cash to the company at a future date
- Payment by any other means giving rise to a present or future entitlement to a payment, or credit equivalent to payment, in cash
In most instances, shareholders will pay for their shares in cash by transferring the nominal value (and share premium, if applicable) to the company’s business bank account.
Where is it shown that shares are unpaid?
The unpaid status of shares must be shown on share certificates and the company’s statutory register of members. It is also a requirement to record unpaid shares on the statement of capital, which should be completed when:
- the company is registered at Companies House
- a confirmation statement is filed
- new shares are allotted
- there is a reduction in the company’s issued share capital
- the value of shares is altered
- splitting or subdividing shares
- changing the currency of shares
- unpaid or partly-paid shares become paid
Directors are also responsible for ensuring share capital – whether unpaid, partly paid, or paid – is shown on the balance sheet as part of the company’s annual accounts.