A guide to shares and share capital

A company will need to issue shares when it is first set up as well as at any subsequent time, if it wants to raise new share capital and/or introduce new shareholders.

Once shares are in issue, they can then be transferred between shareholders or to new shareholders, provided the rules on share transfers are adhered to.

This guide aims to give you some background as to what share capital is and the different types of shares you can have in a limited company.

But before we talk about share capital lets revisit what we mean by shareholder.

What is a shareholder?

A shareholder is the registered owner of shares in a company.

A shareholder is also referred to as a member of a company.

On becoming a member of a company, that shareholder enters into a contractual relationship with the company.

The constitution of the company binds the company and its members in the same way that a contract would (subject, of course, to the fact that the constitution can be amended – or replaced – by the shareholders at any time by special resolution).

Shareholders will often also be bound by a shareholders’ agreement between the company’s members (and the company) to regulate certain aspects of their relationship.

As the company has a separate legal personality, the shareholders are not liable for the acts of the company (except in certain limited circumstances), but likewise, the shareholders do not have a proprietary interest in the underlying assets of the company.

The shareholders are, however, entitled in proportion to their respective share, to a share of the distributable profits of the company and, on a winding up to the surplus assets of the company after the creditors have been repaid.

What is share capital?

On registration of a company limited by shares, the shareholders must agree to take some, or all, of the shares in the company (all limited companies must have at least one shareholder detailed on the incorporation documents).

Share capital is the money invested in a company by the shareholders and in exchange the number of shares of a specified nominal value (which may or may not be divided into one or more class of shares), the company issues to its shareholders.

This investment in the company means the shareholders gain a share of the ownership of the company.

Ownership of shares means control over the company.

Each share must have a fixed nominal value; this is typically €1 but can be of any value.

Each share’s value indicates the amount the shareholder is liable to contribute (per share) if the company closes owing money.

It is important to note that once an investment in a company’s share capital has been made, it is the company that owns the money provided.

The shareholder will obtain a return on this investment through dividends (payments out of profits) and/or an increase in the value of the company when it is eventually sold.

The rights attaching to shares are imposed by the Companies Act, the company’s constitution and any shareholders’ agreement.

There is no ceiling on the number of shares that a company can issue (unless it chooses to impose one), as the concept of authorised share capital was abolished by the Companies Act 2014, and therefore a company’s issued share capital is the number of shares actually subscribed for and issued by the company.

‘Capital’ is a term used to describe the funds that are available to run a company’s business.

In law, the term ‘share capital’ is used to describe the money raised in return for issuing those shares.

What are shares?

If you think of the ownership of your company like a pizza or a cake, shares are the slices of that pizza or cake.

When you allocate shares to someone, you make them a shareholder (and part-owner) of your company.

Share certificates are like the receipts that investors/shareholders are given in return for the money that they pay to become a shareholder.

As you take on more investment funds, you allocate more shares and the size of the slices you’ve allocated so far will alter.

When you start, you own 100% of your business.

If you then take on 2 investors, each contributing some money in return for shares in your business, your ownership will be diluted from 100% to a lower percentage figure.

The difference will be shared, proportionately, between your two new investors.

Why do investors like shares?

Shares are often referred to as a ‘bundle of rights’.

The investor puts money into the company, and in return, they become a part-owner of that company (a shareholder).

The investor gets ‘shares’ and these shares give them certain rights and entitlements as an owner of the company.”

What are those rights?

There are different rights, and you can combine them in different ‘bundles’.

For example, your investor may well:

1. get a right to vote at shareholder meetings;
2. become entitled to dividends – these are rights to receive a share of the profits in your business, once you start making them; and
3. become entitled to a share in any surplus assets of your company, if you end up shutting it down.”

Different investors will have different motives for investing in companies, but most will want to make money (called ‘a return on their investment’) in several ways…

… firstly, by getting income from those dividends

… and, secondly, obtaining a lump-sum gain once they sell their shares for a profit (assuming your company has grown in value and so the investor’s individual shares representing a part share in the company have therefore grown in value by the time they come to sell).

Think of it a bit like the shares growing in value like money you place in a bank earns interest – except if your company is doing well, it will be a much bigger return than what you get as interest on an ordinary bank deposit!

What your investor wants is the value of their original investment back, with a lot of interest.

Investors will want to know what rights you’re offering in return for their investment money.

Different ‘classes’ of shares may carry different rights, and we’ve set out some typical examples of different share classes below (see the section entitled ‘different classes of shares’).

Before we look at the different classes of shares that you could offer in your company, let’s bust some of the other terms that you’ll need to understand when it comes to issuing shares.

What does ‘nominal’ or ‘par’ value mean?

The terms ‘nominal value’ and ‘par value’ are used interchangeably and essentially mean the same thing.

All shares in limited companies that have a share capital must have a fixed nominal value.

Companies often fix the nominal or par value of their shares at €1 or 1c.

So, the nominal or par value is the minimum payable subscription price for that share (in other words, the minimum amount the shareholder must pay to your company for that share).

By law, you can’t issue a share for a price that’s less than its nominal value (You can issue a partly paid share – but don’t normally do this, as the company can call for the balance at any time).

You can, however, issue a share at a price that’s more than its nominal value – and, if you do, the excess will be called the ‘share premium’.

Here’s an example to illustrate this:

Katie decides to set up a company on her own.

She decides:

• to set up the company with 10 shares that will all be held by her
• the nominal value of those shares will be €1 each and
• the shares will be issued to her at par value

So, Katie pays a total subscription price of €10 to the company in return for the shares.

Right now: the company’s share capital consists of 10 shares of €1 each, all of which are held by Katie.

She owns 100% of the share capital in the company.

A year later, Katie decides that the company requires an ‘injection of capital’.

She finds an investor, Daniel, who’s willing to invest €50,000 in her company.

Katie has worked hard in the business, and it has grown substantially.

She takes some advice and concludes that the market value of the shares in her company has increased significantly.

So, she agrees with Daniel that he’ll invest €50,000 in return for 5 shares of €1 each (i.e. he will pay €10,000 per share).

The nominal value of those shares will still be €1 (he will still get 5 shares of €1 each).

But, Daniel will pay a premium on those shares of €49,995 in total.

After the investment: the company’s share capital will comprise 15 shares of €1 each, 10 of which are held by Katie and 5 of which are held by Daniel.

Katie now holds just over 66% of her company.

Daniel holds just over 33% of it – but, as the business has really grown in value, Daniel has had to pay a lot more for his 5 shares.

What’s the difference between ‘paid up’, ‘partly paid’ and ‘nil paid’ shares?

Shareholders don’t need to pay the full amount due on their shares immediately.

The amount of the nominal capital paid is known as the ‘paid-up’ share capital.

If only part has been paid, then the shares will be ‘partly paid’.

If none has been paid, then the shares are ‘nil paid’.

Until the full price has been paid, the outstanding sum will remain as a debt owed by the shareholder to the company and this debt can be called on to be paid at any time.

It’s increasingly rare for shareholders not to pay up the full nominal value of their shares on issue.

Payment for allotted shares

There are four rules for payment for allotted shares.

Firstly, shares must not be allotted at a discount and the full nominal value must be paid by the subscriber.

Secondly, different amounts and payment times can be arranged amongst shareholders if the constitution (articles) allow it.

Thirdly, shares allotted along with any premium, can be paid for in money or money’s worth (e.g. goodwill and know-how).

Fourthly, a share is considered paid up in cash if the consideration is cash or equivalent.

The definition of cash consideration includes:

(a) cash (including foreign currency);

(b) a cheque received in good faith that the directors do not suspect will not be paid;

(c) a release of a liability of the company for a liquidated sum;

(d) an undertaking to pay cash at a future date; and

(e) any other means giving a right to an entitlement to payment or credit equivalent in cash.

Non-cash consideration for future services or work is acceptable only if structured as a contract to perform services for a specified sum now payable, which is paid through fully-paid shares.

However, the company must receive valid consideration for the shares.

This arrangement risks violating the rule against allotting shares at a discount as it is difficult to objectively value such service and may breach directors’ fiduciary duties if the services are not worth the assigned value.

Directors must ensure that the value of non-cash consideration meets the subscription price and that future services will certainly be provided to avoid risks to the company.

What are subscriber shares?

‘Subscriber shares’ are the very first shares that the company is set up with.

The owners of those shares are the ‘subscribers’.

In the Form A1 that you fill in to set up your company at the Companies registration Office (CRO), you’ll be asked how many subscriber shares the company has issued and who those subscribers are.

If you want to create further shares in your company, those shares will need to be newly issued and allotted.

See our guide to issuing shares in your limited company for more information.

Different classes of shares

We stated earlier that shares are a ‘bundle of rights’.

They give various rights and entitlements to their shareholders.

You may wish to give different rights to different shareholders, and you can do this by creating different ‘classes’ of shares within your company.

The rights attaching to the shares are always set out in the company’s Constitution (articles of association).

Below you’ll find some typical examples of different classes of shares.

But every company is different, and a company can attribute whatever rights it likes to its shares.

It’s not the names of the shares that are important, it’s the rights that attach to them that matters, and these rights must always be set out in your company’s articles of association.

So, let’s take a look at them:

Ordinary shares

These are the most common form of share.

They usually carry a right to vote and a right to receive dividends (if profits are made so that dividends can be declared).

A company might have more than one class of ordinary shares with different rights.

For example, it may have ‘A’ ordinary shares, ‘B’ ordinary and ‘C’ ordinary shares each with different rights attached to them.

Non-voting shares

Non-voting shares usually carry identical rights to ordinary shares except the right to vote at general meetings.

Preference shares

A preference share may give the holder a preference (or priority) on payment of any dividends or on a return of their capital on a winding up of the company (or both).

Preference shareholders get the first slice of the pie before the other shareholders become entitled to anything.

Preference shares usually don’t carry voting rights though.

Deferred shares

These usually carry no voting rights and no ordinary right to a dividend, but they are sometimes entitled to a share of surplus profits after other dividends have been paid (assuming there is a surplus).

Most of the time, deferred shareholder rights will contain no rights at all.

They are typically used in specific circumstances where a share of no value is required.

An example of where these shares are used is where the shareholders wish to change their relative voting rights.

They do this simply by changing the rights attaching to certain shares to tip the balance in favour of another shareholder.

Redeemable shares

These are shares that are issued with the intention that the company may, at some point in the future, wish to redeem them.

These shares are seen as an investment but with a fixed return for the investor.

This return would be the subscription price plus any dividend.

Convertible shares

These usually carry an option for the shareholder to convert them into a different class of shares according to stipulated criteria.

This would decrease the investor’s shareholding depending on performance.

If the company performs beyond expectation, then the investor may be prepared to reduce its shareholding on the basis that a smaller shareholding will be worth more.

This will motivate the owner/shareholder to do better as their shareholding will increase.

Why issue different classes of shares?

One of the main reasons for issuing shares of different classes is that a company may wish to issue shares to different groups of people such as friends, family members or investors on different terms.

It may also be important when issuing shares to different groups for voting rights and rights to dividends etc to be more favourable for one group than another.

Therefore, a company may, for example, have A, B & C class shares which carry some or all of the features set out above for a particular share class but have different rights attaching to them.

These rights will need to be reflected in a company’s constitution.

How do you find out what rights are attached to particular shares?

If you want to issue different classes of shares, you must always clearly set out the rights attaching to those shares in your constitution.

This is because a company can attribute whatever rights it likes to its shares; just because something is described as an ‘ordinary share’, for example, doesn’t mean that it’ll have rights akin to what we think of as being ‘ordinary shares’.

Ordinary shares in one company are likely to have different rights to ordinary shares in another company.

Varying class rights and when you need ‘class’ consent

You can create new classes of shares and vary the rights attaching to existing shares by amending your articles of association in your Constitution.

To amend your articles, you’ll need to pass a special resolution (which requires shareholders holding at least 75% of the vote to vote in favour).

However, that may not be enough on its own.

If you’re varying the rights of a particular class of shares, you’ll need a separate class consent.

Your company’s constitution may contain provisions stipulating what’s required by way of ‘class consent’.

If they don’t, then by law, you’ll need the written consent of the shareholders of at least 75% of the issued shares of that particular class.

Is there a maximum and minimum share capital?

All limited companies must issue at least one share on incorporation and as the concept of authorised share capital has been abolished under the Companies Act 2014, there is no ceiling on the number of shares that a company can issue (unless the company chooses to impose one in its constitution) provided that the directors have the necessary allotment authority.

To summarise…

Most companies will start out with ordinary shares, which entitle their shareholders to vote, receive a share of dividends (in proportion to the size of their shareholding) and receive a share of the surplus assets of the company if it is wound up (again in proportion to the size of their shareholding).