A share split involves the subdivision of one company share into two or more shares. By doing so, a company has a greater number of shares of a smaller value to sell to new investors, or can create a more even distribution of control.
In this post, we will briefly explain share splits, why companies with share capital may decide to carry out such a procedure, and the steps involved in doing so.
Why would a company split its shares?
Often referred to as a subdivision of shares, a company would carry out a share split to divide its existing issued shares into more shares of the same class. For example, splitting one ordinary share with a £10 nominal value into 10 ordinary shares with a nominal value of £1 each.
Companies will often subdivide shares when their market value increases, thus splitting the business into smaller pieces and enabling members to sell some of their shareholdings to other members or new investors. This process can be used as an alternative to issuing more shares or selling larger percentages of the company.
When share splits take place, the percentage and value of each member’s total shareholdings remain the same, as does the company’s value. The only thing that changes is the number of issued shares and their individual nominal value.
By having more shares of a smaller value, rather than fewer shares of a higher value, a company can improve its liquidity and marketability to attract new investors. It also makes it easier for members to manage the ownership structure of the company and sell some of their shareholdings without losing too much control.
How to subdivide company shares
Share splits may seem like a simple enough concept, but they can be complex.
Choosing to subdivide company shares could have a considerable impact on your business, so we would urge you to seek professional advice to ensure that any such action is carried out properly and in a way that is most beneficial to the success of the company.
Should you decide to carry out a share split, the following steps will be required:
1. Check the articles of association and shareholders’ agreement
First and foremost, you must check your company’s articles of association and any shareholders’ agreement for restrictions or rules on the subdivision of shares.
No such restrictions are set out in the Model articles, but some companies may prohibit share splits or include certain conditions in bespoke articles or a shareholders’ agreement.
Should any such clauses exist, you would need to alter the articles and/or the share agreement accordingly. To do so, the existing shareholders would be required to pass a special resolution approving any such amendment.
2. Pass a members’ resolution
The next step is to pass a resolution of the members to authorise the proposed share splits. In most companies, an ordinary resolution will suffice for this type of decision, but you should check the articles and shareholders’ agreement in case a special resolution is required.
You can pass a shareholders’ resolution on a poll, or by a show of hands at a general meeting. Alternatively, the decision can be made by written resolution.
You do not have to send a copy of any ordinary resolutions to Companies House. This requirement only applies to special resolutions. However, you must retain copies of all resolutions, whether ordinary or special, with your company records for a minimum of 10 years.
3. Complete Companies House form SH02
You must notify Companies House of share splits using form SH02 – Notice of consolidation, sub-division, redemption of shares, or re-conversion of stock into shares.
To following details should be provided on this form:
- Company name and registration number
- Date of resolution approving the subdivision of shares
- Previous share structure – share class, number of issued shares, and nominal value of each share
- New share structure after subdivision – share class, number of issued shares, and nominal value of each share
- Updated statement of capital to show the company’s issued capital following the subdivision reported on the form
- Prescribed particulars of rights attached to each class of shares shown on the form
You can deliver this form electronically using the Upload a document to Companies House service, or you can download it and send it to Companies House by post. It’s quicker and more secure to file forms electronically.
4. Update the company’s statutory registers
As soon as possible after carrying out a subdivision of shares, you must update your company’s statutory register of members to reflect the changes – i.e. the quantity and nominal value of shares held by each member.
Many shareholders are also people with significant control (PSCs). Therefore, if any member chooses to transfer some of their shares following a subdivision, you may also have to update your company’s statutory register of people with significant control (PSC register) to reflect these changes.
5. Create new share certificates
When any changes to shareholdings take place, the company must issue new share certificates to the affected members within two months of the subdivision.
These certificates are important, because they serve as legal proof of ownership, specifying the class, quantity, and nominal value of shares held by each member.
6. File a confirmation statement
When it is time to file your company’s annual confirmation statement, you must check that all of the share information held at Companies House and shown on the public register is accurate and up to date.
If any details relating to shares or shareholders are incorrect, you can update them on the confirmation statement. Companies House will then make the necessary changes to the information displayed on the public register.
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Whilst not particularly common in small private companies, share splits can be beneficial in certain circumstances. Most notably, when the value of a company’s shares has increased and it wishes to improve its liquidity and marketability to attract new investors.
Prior to subdividing shares in your limited company, we would advise speaking to an accountant to ensure that a share split procedure is the best option for your business.
Should you have any questions about this post, please do not hesitate to comment below or contact our company formation team.