How Does a Company Issue Corporate Shares

How Does a Company Issue Corporate Shares?

Feb 21, 2022
Reading Time: 8 minutes
Written by Angela Omari

Knowing how to issue shares is crucial if you want your business to grow.

When you require a cash injection to increase your business operations, start a new project, or protect your market share, you might need more funds than your retained earnings. 

Your company then has two options – take on debt or raise more capital.

Taking on more debt is simpler, as you simply require a reasonable expectation of a steady cash flow to cover the interest payments. 

However, if your company is already highly geared (high debt to shareholders’ equity ratio), increasing the debt will also increase your company’s risk towards the investors and result in a share price drop.

Keep reading if you want to learn more about how your company can issue corporate shares.

Shares issue and shares transfer

As a company owner, you can choose to issue a corporate share through either a share issue or a share transfer.

What are they? Let’s go through it.

A share issue involves dividing the company’s ownership into shares and distributing them to new investors, employees or existing shareholders. Whether you own a public or a private company, you can issue any number of shares, provided you issue a share certificate to each new shareholder. 

You would also need to keep a register containing the details of each shareholder in your company.

On the other hand, a share transfer is similar to a share issue but moves existing shares from one shareholder to another. 

Here is an example:

There are two shareholders in ABC Pty Ltd (not a real company), Sally and Amy. Each owns 100 shares in the company. The total share capital is 200, and each owns 50% of the company. 

The example below will show you what will happen if a new shareholder joins the company through a share transfer and share issue:

1. Share Issue

  • Share Sale and Purchase – A new shareholder (Kim) purchases 100 new shares at $10 per share
  • Outcome – Sally, Amy and Kim will each have 100 shares with a total of 300 shares in the company. This means they have 33.33% in ABC Pty Ltd.
  • Value – ABC Pty Ltd receives $1,000 from Kim

 2. Share Transfer

  • Share Sale and Purchase – Sally sells 20 of her shares to Kim for $10 per share
  • Outcome – There are three shareholders
    • Amy – 100 shares and 50% of the company
    • Sally – 80 shares and 40% of the company
    • Kim –  20 shares and 10% of the company 
  • Value – Sally receives $200 from Kim for her 20 shares

How can you issue shares (compliance)?

When issuing shares, you must ensure that you comply with your company’s Shareholders Agreement, your company’s constitution, and most importantly, Corporations Act 2001 (Cth)

Further compliance requirements are similar to the requirements for share issuance for private companies. As a public company owner, there are various types of share issues that you can participate in.

The other 4 factors you need to consider in order to be compliant when you issue shares are:

1. Assess the capital

  • Assess the amount of capital you require to grow your business
  • Decide whether you wish to issue a share to fund your next project
  • Notify existing shareholders of your intent to issue a company share

2. Negotiations

  • Entering into commercial discussions with new shareholders requires negotiations using a term sheet
  • A term sheet is a precursor document that you can use during the negotiation stages. While not a legally binding document, except for clauses like confidentiality and exclusivity, it’s a good way to document your terms
  • A term sheet needs to include – Price per share and the total amount the company is looking to raise

3. Agreement 

4. Administrative Steps

  • To receive the funds, you must prepare an application form for new shareholders to sign
  • The application needs to include
    • Subscribe for a share
    • Consent to your company’s constitution
    • Authorise that their details be recorded on the company’s register
  • Once the application has been filled out, you need to prepare a share certificate and update both your internet register and ASIC within 28 days of the issue.
Corporate Shares

Types of Share Issues

Rights Issue

A rights issue is one of the most common ways of issuing a share to existing shareholders. It involves offering existing shareholders the right to buy new a share proportionate to their current holdings at a specific price. 

To make the deal worthwhile, you need to set the buying price lower than the current share price.

For example, say each of your shareholders owns 1000 shares in your company, at $5 per share. You could offer them a 1-for-5 rights issue at $4 per share if you wanted more capital. Therefore, they would own an extra share for every 5 shares, or 200 new shares at $800.

While this might seem like a loss initially, the issuing of a new share will dilute the market and theoretically bring the share price down to $4.83, compensating for the discounted rights issue. 

Therefore, you will be able to gain more capital without harming the company’s market image.

Placement

Rights issues can involve a lot of organisation and resources. Therefore, you can use a Placement to raise capital by issuing a new share to a specific institution or a small group of people. 

For example, say there are 100 existing shares in the market. You could issue 10 new shares to an investment bank at the market share price and raise the required capital. 

While this will theoretically dilute the profit per share to the existing shareholder, the additional capital could potentially increase overall profits, compensating for the dilution.

Share splits

If you believe that your company’s share price is too high, you can perform a share split. 

It’s why a company such as Telstra is trading at around $3/share, despite being a multi-million dollar company.

If your company’s Market Cap is $1 million, for example, theoretically, your company would be more valuable to investors at 250,000 shares at $4 per share, instead of 4 shares at $250,000. 

Therefore, when you believe that your company’s share price reaches a certain threshold, you could perform a 2-for-1 or even 3-for-1 share split to reset the share price to desirable levels.

Issuing a new share can be a long and arduous process. Hiring a good Capital Raising Lawyer will ensure you get the maximum return on capital without losing your company’s ownership.

Classifying a share

A share in a company may be divided into classes of shares, such that the rights given to one group of shareholders are not provided to another. 

One important thing to remember is that there isn’t just one type of share; there are, in fact, 4 popular ways a company can issue a share. 

Let’s go through them:

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1. Ordinary share

When all the shares in a company are of one type, they are classified as an ordinary share. 

Most shares traded on ASX are ordinary shares, and they carry no special or preferred rights. 

Ordinary shareholders are typically entitled to vote at a general meeting of the company and participate in dividends or the distribution of assets resulting from the winding up of the company.

Ordinary Share Value

Are you wondering how to calculate the value of an ordinary share?

One formula you can use is: Ordinary Share Capital = Issue Price of Share * Number of Outstanding Shares

  • Issue price of share – This is the face value of the share at which it is available to the public 
  • Number of outstanding shares – This is the number of shares available to raise the required amount for capital 

Let’s go through an example:

Suppose your company sells 100 shares, having a face of $1 per share. The calculation will be 

  • Issue share capital = $(100*1)
  • Issue share capital = $100 of your company 

2. Preference Share

Companies have the power to issue preference shares, including redeemable preference shares under s 254A(1)(b) of the Corporations Act. 

These shares are given priority/preference, meaning that these shares are given priority or preference over: 

  • An ordinary share on matters such as repayment of capital o participation and surplus assets and profits
  • Dividend entitlements- s 254(2)
  • A preference share will usually have limited voting rights, which are restricted to the situation where dividends are in arrears – a preference share entails less risk

3. Redeemable Preference Share

Some preference shares are issued on the basis that they may be redeemed by a company before winding up. This is called a redeemable preference share.

The modern redeemable preference share is designed to protect the investors and shareholders, thereby further assimilating their position with the secured creditors.

The share may be redeemed in three ways under s 254(A(3) of the Corporations Act

  • At a fixed time or on the happening of a particular event
  • At the company’s option
  • At the shareholders’ option

4. Employee Share

An employee share is a way to achieve greater levels of employee participation in the company’s business.

The employer company, whether that is you, can offer a share to your employees (usually at less than the market price) to provide an incentive to:

  • Increase the company’s profits
  • Reinforce a link between the success of the business and the work of the employees

Essentially it is designed to achieve interdependence between the employer and their employees for their long-term mutual benefit.

How is the share price for company shareholders determined?

Are you now thinking about how a company’s share price is determined? Here are some tips that can help you.

Ultimately, the stock market is driven by supply and demand, similar to any market. A buyer and seller exchange money for ownership of a stock when it is sold. A new market price is established when the stock is purchased.

Understanding supply and demand sounds simple, doesn’t it? But there are other factors to consider when determining how much a share is worth. 

Factors that are taken into consideration when determining a share price include:

  • Current earnings – This is how much profit a stock makes
  • Prospects for the company’s future
  • Growth investors expect in the future 

Now that we’ve covered what impacts the share price, here are some techniques used to predict the price of a company’s share:

  • Dividend discount model (DDMs) – This is based on a stock’s current price equaling the sum total of all its future dividend payments when discounted back to their present value. The DDM model uses the theory of time value of money 
  • Gordon growth model – Present value of stock = (dividend per share) / (discount rate – growth rate)
  • P/E Ratio – The P/E ratio is calculated by dividing the price of the stock by the total of its 12-months trailing earnings

If you’re still not sure, why not hire a Lawpath lawyer to help you with every step of the way to determine the share price.

How many shares to include as a minimum?

Whether you’ve had your company for a while or you’re a new founder, have you ever asked the question ‘How many shares should I include as a minimum?’

If you have, you’re not alone because this is a question our lawyers frequently receive. 

Here are a few ways you can a issue share

1. Dividing shares equally 

This approach is simple and requires you to distribute the number of shares equally among your co-founders. If this is the approach you wish to take, keep in mind:

  • The shares you will issue to shareholders need to be whole numbers. For example, you can’t issue 1.5 shares
  • You need to set a price per share and pay this upfront, e.g. $0.03 per share

Here is an example of this approach. You have 400 shares and 4 co-founders. In this situation, you will all receive 100 shares.

2. Diving shares based on co-founder contribution

This approach is similar to dividing shares equally among shareholders but considers the co-founder’s contribution. For example, if you have 300 shares and there are 3 co-founders, it could be divided like this:

  • 200  – 1 co-founder
  • 50 –  2 co- founder
  • 50 – 3 co-founder

Conclusion

Knowing how to issue shares is crucial if you want your business to grow.

You will need to consider the particular circumstances of your business when determining when and how much to issue.

If you want more information on how to issue shares, contact a Lawpath Lawyer.

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