Share redenomination (also known as redenomination of share capital) is the conversion of company shares with a fixed nominal value in one currency to a fixed nominal value in a different currency.
All companies limited by shares must assign a nominal value (also known as the par value) to each of its shares upon incorporation – this will normally be a low figure such as £1 or even £0.01, but it can be a different value. This nominal value denotes the sum that shareholders must pay in respect of each share if the company is wound up; in other words, it represents the ‘limited liability’ of company members.
The nominal value of shares should be distinguished from the market value (i.e. the amount paid for shares, which is generally higher); the difference between the nominal value and the market value is known as the ‘share premium’.
Sections 622 – 628 of the Companies Act 2006 set out the rules which companies must follow regarding any redenomination of share capital. Under section 622 (1): “A limited company having a share capital may by resolution redenominate its share capital or any class of its share capital.”
Why undertake a share redenomination?
There are several different reasons that a company may decide to redenominate its share capital. For example:
- Raising investment in multiple jurisdictions
A company may initially seek investment in the country where it was incorporated, but will then look to international investors to help grow the business. This could mean that it will end up having shares with nominal values across various different jurisdictions (e.g. £1 in the UK and $1 in the US and €1 in France etc). In this scenario, the company may wish to undertake a share redenomination to align the different shares so that they are all under one currency rather than being spread across different currencies.
- Moving to a different country
Occasionally a company may decide to move its primary operations or headquarters to a different jurisdiction. This may be as a result of external investment, an international acquisition or simply a decision to take advantage of favourable trading conditions outside the country in which the company was originally incorporated.
If a company opts to move to a new region with a different currency to the one upon which its nominal share values are based, then it will often make sense to redenominate its share capital to the new currency. This will ensure that group accounts and financial documents will be consistent with the new jurisdiction.
- Requirement to change currency
Although the UK never adopted the Euro, had it done so, UK companies would have probably had to undertake a share redenomination. This may now seem irrelevant in light of Brexit, but British companies which decide to move to the EU for commercial reasons may need to redenominate their share capital.
Process for undertaking a redenomination – preliminaries
There are various issues which should be taken into consideration before effecting a redenomination of share capital, to avoid any administrative problems or other unforeseen consequences:
It is vital that a company checks its shareholders’ agreement and articles of association. These may contain restrictions or specify permissions which must be sought to undertake a redenomination of share capital.
If either of these documents prevent a redenomination, it may be necessary to amend these; a special resolution (passed by 75% or more of the shareholders present and voting at a general meeting) is required to amend the articles of association – and a shareholders’ agreement may require unanimous approval of any proposed changes.
- Class rights
The class rights pertaining to shares may specify that a redenomination of share capital will essentially comprise a variation of these rights. If this is the case, the consent of any relevant shareholders (i.e. those who hold this specific class of shares) will need to be sought before undertaking the redenomination.
- Preferential rights
If a company has raised investment in several different countries, there may be classes of shares with preferential rights (e.g. liquidation preference with reference to how much has been paid for shares) which were paid in different currencies. In this case, it will make sense to amend the articles of association to ensure that preference amounts are in a single unified currency.
However, it will be necessary for shareholders to agree which exchange rate to use – to avoid any disputes regarding different exchange rates which may have existed on different dates when shares were purchased by different shareholders etc.
- Reduction of share capital
Companies which decide to undertake a redenomination of share capital will often decide to also reduce their share capital to ensure that the share values consist of rounded amounts in the new currency (e.g. to avoid fractions and provide alignment with existing nominal values).
Section 626 of the Companies Act 2006, headed “Reduction of capital in connection with redenomination” states that: “A limited company that passes a resolution redenominating some or all of its shares may, for the purpose of adjusting the nominal values of the redenominated shares to obtain values that are, in the opinion of the company, more suitable, reduce its share capital”. This requires a special resolution be passed within three months of the redenomination resolution.
The share capital reduction cannot exceed 10% of the nominal value of the company’s allotted share capital immediately after the reduction and, under section 628, the amount by which a company’s share capital is reduced must be transferred to a “redenomination reserve” (this reserve may be applied by the company in paying up shares to be allotted to members as fully paid bonus shares).
There is no need for court approval or solvency statement if there is a reduction of capital in connection with redenomination, but Companies House must be notified within 15 days of the resolution being passed (section 627).
In the case of a reduction of capital in connection with redenomination, it is important to pay heed to any references to nominal share capital in the company’s articles of association or shareholders’ agreement, to ensure that shareholders are not adversely affected by any changes to the aggregate nominal value of their shareholdings.
Furthermore, if reduction in share capital unintentionally results in a shareholder’s holding of ordinary shares dropping below 5%, they could lose their entitlement to capital gains entrepreneurs’ relief.
Process for undertaking a redenomination – practical steps
In general, the main action which needs to be taken to effect a redenomination of share capital is to hold an ordinary resolution, subject to any restrictions or bespoke instructions contained in the company’s articles of association or shareholders’ agreement. An ordinary resolution requires a ‘simple majority’ – which means that more than 50% of the votes cast are in favour of the resolution.
It requires a vote to be taken as: a general meeting of shareholders; a board meeting of directors; or by written resolution.
Section 622 of the Companies Act 2006 states that the conversion to the new currency “must be made at an appropriate spot rate of exchange specified in the resolution”… which must be either “a rate prevailing on a day specified in the resolution, or … a rate determined by taking the average of rates prevailing on each consecutive day of a period specified in the resolution.”
The redenomination itself takes place “on the day on which the resolution is passed, or … on such later day as may be determined in accordance with the resolution” – but if the redenomination has not taken effect at the end of the period of 28 days (beginning on the date on which it is passed) it will lapse.
Section 623 provides the following calculation of new nominal values upon redenomination of share capital:
Take the aggregate of the old nominal values of all the shares of that class.
Translate that amount into the new currency at the rate of exchange specified in the resolution.
Divide that amount by the number of shares in the class.”
Section 624 states that the “redenomination of shares does not affect any rights or obligations of members under the company’s constitution, or any restrictions affecting members under the company’s constitution” – and, in particular, it “does not affect entitlement to dividends (including entitlement to dividends in a particular currency), voting rights or any liability in respect of amounts unpaid on shares.”
Section 625 outlines the requirement for companies to notify Companies House of a redenomination of share capital, which must be done within one month of passing the resolution. Form SH14 can be used to give notice of a redenomination of shares.
Please note that failure to notify Companies House amounts to an offence being committed by the company and “every officer of the company who is in default” – which can result in fines.
Quality Company Formations offers a service to help companies undertake a share redenomination for just £199.99 plus VAT. If you require help with redenomination of share capital, speak to our Company Secretarial Team today by calling 0203 984 5389 or emailing email@example.com.