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Bonus Issue of Shares

Bonus Issue Of Shares 

Managing company finances can be difficult, especially when it comes to decisions about rewarding your shareholders and boosting your company’s equity. However, one powerful tool at your disposal is a bonus issue of shares. 

At first glance, issuing shares without receiving cash in return might seem counterintuitive, but for many businesses, a bonus issue can be a strategic move that allows you to: 

• Reward shareholders without dipping into cash reserves; 

• Make shares more affordable and attractive to a broader range of investors; 

• Reinforce your company’s balance sheet; 

• Increase share capital without altering ownership proportions. 

While the benefits of a bonus issue are clear, the process itself is not without some challenges. Companies often face complexities in issuing bonus shares including regulatory compliance with the Companies Act 2006 and getting necessary approvals from the board of directors.

• What is a bonus issue of shares?

• How does a bonus issue of shares work? 

• Why should my company consider issuing bonus shares? 

• What are the potential disadvantages of a bonus issue of shares? 

• What are the requirements for issuing bonus shares under UK law? 

• How do I determine if my company has sufficient reserves for a bonus issue? 

• What are the tax implications of a bonus issue for the company and shareholders? 

• How does a bonus issue affect ownership and control of the company?

• What is the difference between a bonus issue and a stock split?

• Can a private company issue bonus shares? 

• How long does it take to complete a bonus issue of shares? 

• What documentation is required for a bonus issue of shares? 

• How can a solicitor assist with a bonus issue of shares?

• What should I consider when choosing a solicitor to help with a bonus issue of shares? 

• Can a bonus issue be reversed or undone once it has been implemented? 

• How does a bonus issue of shares differ from paying dividends to shareholders? 

• Can bonus shares be issued to employees as part of an incentive plan? 

At Lawhive, our network of experienced corporate lawyers will guide you through every step of the bonus issue process, from drafting resolutions and preparing necessary documentation to liaising with regulatory bodies. Our goal is to make the process as smooth and efficient as possible, so you can focus on your business.

Contact us today to schedule a free case evaluation with our legal assessment team and get a no-obligation quote for personalised support with a bonus issue of shares. 

What is a bonus issue of shares?

A bonus issue of shares (also known as a scrip issue or capitalisation issue) is a way for a company to give additional shares to its existing shareholders at no extra cost. 

This means that if you already own shares in a company, you receive more shares for free based on the number you currently hold. 

How does a bonus issue of shares work? 

1. The company’s board of directors decides to issue bonus shares by converting part of the company’s reserves (profits have been saved up) into share capital; 

2. The company allocates these new shares to existing shareholders; 

3. Shareholders are informed about how many bonus shares they will receive and when they will be issued. 

If you’re considering a bonus issue of shares for your company, the process involves several legal and regulatory steps.

At Lawhive, our expert corporate lawyers can guide you through every aspect of issuing bonus shares. Contact us to schedule a free case evaluation and get a no-obligation quote for our services. 

Why should my company consider issuing bonus shares? 

Key reasons why your company might consider a bonus issue of shares include: 

Rewarding your shareholders 

Bonus shares are given free of charge to existing shareholders based on their current holdings. These additional shares increase their ownership stake in the company over time if the company continues to perform well. 

This can be a great way to reward shareholders for their loyalty and investment without paying cash. 

Improving share liquidity and market perception 

By increasing the number of shares in circulation, the individual price per share usually decreases, making shares more affordable. A lower share price and increased liquidity can make your shares more attractive to new investors, leading to increased trading activity, potentially boosting demand and improving the overall perception of your company in the market. 

Strengthening your capital structure

A bonus issue converts part of your company’s retained earnings or reserves into share capital. This strengthens your capital base and can improve the financial stability and credibility of your company.

A stronger equity base can make your company look more financially robust, which can be beneficial when seeking financing or negotiating with business partners.

Maintaining shareholder control 

A bonus issue of shares doesn’t dilute the ownership percentage of existing shareholders. Instead, they receive additional shares proportional to their current holdings. 

Since the ownership percentages remain unchanged, the voting power of shareholders at company meetings stays consistent, maintaining the current balance of control. 

Signaling financial health 

Announcing a bonus issue can be seen as a positive signal that your company is confident in its financial health and future growth. It indicates that you have sufficient reserves and are willing to share this success with your shareholders. 

This can boost confidence among current and potential investors, helping to build a strong, more supportive shareholder base. 

What are the potential disadvantages of a bonus issue of shares? 

While issuing bonus shares can offer several benefits, it’s important to be aware of the potential disadvantages. These drawbacks can impact your company's financial health, market perception, and operational efficiency.

Impact on share price and market perception

When a company issues bonus shares, the total number of shares increases resulting in a decrease in the price per share because the company’s overall value is now spread across a larger number of shares. 

There is the potential for investors to misunderstand the purpose of a bonus issue and see the reduced share prices as a sign of diminished value, even though their overall ownership in the company remains unchanged. 

Administrative and compliance burdens

Issuing bonus shares requires approvals from the board of directors and shareholders, compliance with the Companies Act 2006, and possibly adhering to stock exchange regulations if the company is publicly listed. As you might imagine, this can be time-consuming and resource-intensive. 

The bonus issue process also generates additional administrative tasks, such as updating the shareholder register, preparing necessary documentation, and communicating with shareholders. 

No immediate cash flow benefit

Unlike other forms of equity financing, such as rights issues or public offerings, a bonus issue does not bring any new funds into the company. It only converts existing reserves into share capital. This means that the company doesn’t receive a cash infusion to support growth or operational needs. 

Issuing bonus shares also uses up a portion of the company’s retained earnings or reserves, reducing the financial cushion available for future investments or emergency needs. 

What are the requirements for issuing bonus shares under UK law?

Issuing bonus shares in the UK involves converting part of a company's reserves into share capital, giving additional shares to existing shareholders at no extra cost. To do this legally, there are several key requirements that a company must follow under UK law:

1. The company must have enough retained earnings or reserves to cover the value of the bonus shares being issued; 

2. The company’s board of directors must first approve the bonus issue; 

3. Shareholders need to pass an ordinary resolution at a general meeting or through a written resolution agreeing to the bonus issue; 

4. The company’s Articles of Association (the rules governing the company) must allow for the bonus issue; 

5. Detailed documentation must be prepared, including the board and shareholder resolutions;

6. If physical share certificates are used, new certificates must be issued to reflect the bonus shares given to shareholders; 

7. The company must inform Companies House by filing a statement of capital within one month of shares being issued; 

8. The company’s statutory records must be updated to reflect the new share capital after the bonus issue. 

How do I determine if my company has sufficient reserves for a bonus issue? 

Reserves eligible for a bonus issue are typically a company’s retained earnings (accumulated profits that have not been distributed to shareholders as dividends) or other distributable reserves. 

To determine if your company has sufficient reserves to issue bonus shares you should decide how many bonus shares you plan to issue and at what ratio (e.g. 1 bonus share for every 5 existing shares), then multiply the number of bonus shares by their nominal value to calculate the total amount required from the reserves for the bonus issue. 

You should then make sure your company’s retained earnings or other distributable reserves are equal to or greater than the total value required for the bonus issue. If the reserves are insufficient, the company can’t go ahead with the bonus issue without increasing the reserves first. 

Example: 

Imagine your company wants to issue 1 bonus share for every 5 existing shares, and each share has a nominal value of £1. If there are 100,000 existing shares the calculations would be: 

• Number of bonus shares: 100,000 divided by 5 = 20,00 

• Total value required: 20,000 shares x £1 = £20,000

You would then need to make sure your company has at least £20,000 in distributable reserves to cover this bonus issue. 

What are the tax implications of a bonus issue for the company and shareholders? 

The act of issuing bonus shares does not create a tax liability for the company. Since bonus shares are issued from the company’s reserves and no new funds are raised, there is no taxable income generated from this transaction.

Further, shareholders do not pay income tax when they receive bonus shares nor does the issuance of bonus shares create an immediate capital gains tax event. 

How does a bonus issue affect ownership and control of the company?

In a bonus issue, shares are distributed to existing shareholders in proportion to their current holdings. This means that each shareholder’s percentage of ownership in the company remains the same before and after the bonus issue.

Because bonus shares are distributed proportionally, there is no dilution of control among existing shareholders. Each shareholder retains the same voting power relative to their original holdings.

What is the difference between a bonus issue and a stock split?

Both a bonus issue and stock split increase the number of shares in circulation however, while a bonus issue converts reserves into share capital to reward shareholders and bolster equity, a stock split adjusts the share price to enhance affordability and liquidity without impacting the company’s financials. 

Can a private company issue bonus shares?

A private company can issue bonus shares. The process is similar to how public companies issue bonus shares in that private companies must comply with the provisions of the Companies Act 2006 and the Articles of Association must allow for it. 

How long does it take to complete a bonus issue of shares? 

Completing a bonus issue of shares can take between 6-12 weeks. 

Here’s a breakdown of the key stages and their typical durations, however, these may vary depending on the complexity of your company’s structure, the readiness of the financial and legal documentation, and the efficiency of the approval process: 

What documentation is required for a bonus issue of shares? 

Here’s a list of the documents needed for a bonus issue of shares: 

Board resolution

The board of directors must approve the bonus issue by passing a formal resolution. Minutes of the board meeting where the resolution is passed must be recorded and kept as part of the company's official records.

The resolution should include:

• The amount of reserves to be capitalised 

• The ratio of the bonus issue 

• The record fate 

• Terms of the issue 

Shareholder resolution

Depending on the company's Articles of Association and the Companies Act 2006, shareholder approval may be required. The resolution can be passed either at a general meeting of shareholders or through a written resolution. Records of the meeting minutes or the signed written resolution must be maintained.

The resolution should outline the proposal for the bonus issue and confirm that the shareholders agree to the terms and conditions set forth by the board.

Updated Articles of Association (if applicable)

If the company’s Articles of Association don’t allow for a bonus issue, they need to be amended with shareholder approval to specify the new provisions. 

A copy of the updated Articles of Association should be prepared and filed with Companies House if amendments are made.

Statement of Capital

The Statement of Capital is required to update Companies House about the changes in the company’s share capital due to the bonus issue, including the number of shares issued and their nominal value. 

This must be completed and filed with Companies House within one month of the bonus shares being issued.

Updated Register of Members

The register of members must be updated to include the new number of shares held by each shareholder after the bonus issue.

New share certificates (if applicable) 

If the company issues physical share certificates, new certificates must be provided to shareholders reflecting their increased shareholdings. Each certificate should show the new total number of shares owned by the shareholder after the bonus issue.

At Lawhive, we provide comprehensive support to manage the documentation and compliance requirements for a bonus issue of shares. Our experienced corporate lawyers will guide you through every step, ensuring all necessary documents are prepared, filed, and maintained correctly.

Contact us today to schedule a free case evaluation and get a no-obligation quote for our services.

How can a solicitor assist with a bonus issue of shares?

A solicitor can help with a bonus issue of shares by: 

1. Reviewing your company’s Articles of Association to ensure they permit a bonus issue and, if necessary, draft and secure approval for amendments to the Articles; 

2. Ensuring that the bonus issue complies with all relevant provisions of the Companies Act 2006 and other applicable laws; 

3. Drafting the required board and shareholder resolutions to approve the bonus issue; 

4. Preparing and filing form SH01 (Statement of Capital) with Companies House; 

5. Identifying and mitigating potential risks associated with the bonus issue; 

6. Providing legal representation and guidance to resolve any disputes that may arise during or after the bonus issue. 

At Lawhive, we offer expert legal support for companies planning to issue bonus shares. Our network of experienced corporate lawyers provides comprehensive services tailored to your specific needs, ensuring a smooth and compliant bonus issue process.

Contact us today to schedule a free case evaluation and receive a no-obligation quote for our services.

What should I consider when choosing a solicitor to help with a bonus issue of shares? 

Expertise in corporate law

You should look for a solicitor who specialises in corporate law and has extensive experience with corporate actions like bonus issues.

Ideally, your solicitor should have a proven track record of successfully handling bonus issues for other companies, particularly in your industry. 

Understanding of your business needs

Choose a solicitor who understands your industry and the specific challenges and opportunities it presents. They should take the time to understand your company’s goals, financial position, and shareholder base to align the bonus issue strategy with your business objectives. 

Communication and transparency

Your solicitor should be able to explain complex legal concepts in simple terms, provide clear guidance, and keep you informed at every stage.  Further, they should be accessible and responsive to your needs. 

Look for a solicitor who offers transparency and predictable fee structures so you have a clear outline of their costs upfront. 

Reputation and references

Check the solicitor’s qualifications and reputation in the legal and business community, Look for client testimonials, reviews, and any professional accolades or recognition that indicate their credibility and reliability. 

At Lawhive, our network of legal professionals includes seasoned corporate lawyers with extensive experience in handling bonus issues. We also offer end-to-end support for the bonus issue process, and our lawyers are committed to clear, jargon-free communication and proactive engagement. 

Contact us today to schedule a free case evaluation and receive a no-obligation quote for our services.

Can a bonus issue be reversed or undone once it has been implemented? 

A bonus issue is typically considered a final and irrevocable transaction once the new shares have been issued and recorded. 

After receiving bonus shares, shareholders gain legal rights and ownership of these shares. Attempting to reverse this process would involve retracting shares from shareholders, which could infringe on their legal rights and lead to disputes.

Given the complexities and potential consequences of reversing a bonus issue, companies typically explore alternative solutions to address any issues arising from the bonus issue. These alternatives include:

• Repurchasing shares; 

• Consolidating shares; 

• Adjusting the terms of any future corporate actions. 

In the event of disputes with shareholders, open and transparent communication can help manage expectations and address concerns, or in some cases negotiate mutually acceptable adjustments or compensations if appropriate. 

How does a bonus issue of shares differ from paying dividends to shareholders? 

A bonus issue involves distributing additional shares to existing shareholders without any cash exchange. In contrast, dividends are cash payments made directly to shareholders from the company’s profits or retained earnings. 

As such, dividends offer an immediate cash return to shareholders, while a bonus issue increases the number of shares they hold, potentially increasing their long-term value without immediate income. 

Can bonus shares be issued to employees as part of an incentive plan? 

Companies can establish employee share schemes, such as Employee Stock Ownership Plans (ESOPs) or Share Incentive Plans (SIPs), which may include the issuance of bonus shares as part of the incentive package. These schemes are designed to offer shares or share options to employees under specific terms and conditions.

To do this, the company must define clear terms and conditions for the bonus shares issued under the incentive plan, including eligibility criteria, the number of shares to be issued, vesting periods, and any performance targets that need to be met for employees to receive the shares. 

How can Lawhive help? 

Issuing bonus shares can be a powerful tool for enhancing your company’s financial health and rewarding shareholders, but understanding the legal and regulatory process involved can be challenging. 

At Lawhive, we offer expert legal support to streamline the bonus issue process. Our network of experienced corporate lawyers is committed to providing personalised, efficient, and cost-effective services. 

We guide you through every step, from planning and approvals to documentation and compliance, ensuring your bonus issue of shares is executed smoothly and successfully.

Contact us today to schedule a free case evaluation and receive a no-obligation quote for our services.