New shareholders can be introduced to a company in two main ways: by issuing new shares or by transferring shares by way of a sale or gift. These are relatively simple procedures; however, it is important to understand the basic requirements of how this can be done. In this article we will be dealing with how to issue new shares.
Issuing New Shares
Companies may want to issue new shares for many reasons, such as bringing in outside investors to raise capital or increasing the number of shares to existing shareholders to raise capital. Capital could be required to fund an expansion of the company or to pay debts. Another reason to issue new shares may be to introduce a bonus “option” scheme for employees or to gift shares to family members.
To issue and allot new shares, a company will usually receive a Share Subscription Letter, in which the new investor makes a formal application to subscribe for the shares. This letter clearly sets out the number of shares requested, the price to be paid (if any), and the method of payment (if any).
The board of directors must must either convene a board meeting or pass a board resolution to approve the application for the shares and to authorise the issue and allotment of the new shares.
Once the board of directors has approved the issue of the new shares, a Share Certificate should be issued to the new member. The Share Certificate records the number of shares held by the new member.