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How To Issue Shares In A Private Company

How To Issue Shares In A Private Company

Are you a private company looking to issue shares? 

This is a great sign of growth! Whether you’re issuing shares to attract employees in an employee share scheme or to offer it to your co-founders, or to raise money from investors, we understand that knowing the process around issuing shares isn’t an easy one, and there’s a lot to consider. 

In this article, we’ll take you through the steps involved in the process of issuing shares, so read along! 

Can a Private Company issue Shares?  

A Private company (also known as a Proprietary limited company) can create and issue shares, despite not being listed on the Australian Securities Exchange (ASX) like public companies. 

However, they’re limited by the number of shareholders they can have and how they can distribute these shares.

A private company is limited to having 50 shareholders who aren’t employees of the company. It’s important to note that employees with shares or shareholders connected with crowd-source funding (CSF) offers don’t contribute to this number.

Additionally, it must be noted that proprietary companies aren’t limited to 50 shares. A company may have thousands of shares, but these can only be controlled by 50 individuals (excluding employees and CSF shareholders) at any given time.

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How to Issue Shares: 3 Common Ways 

Private companies are allowed to issue shares pursuant to section 254A of the Corporations Act 2001(Cth).  A Proprietary company isn’t able to use the Australian Securities Exchange ASX as a platform to sell its shares. 

However, the Corporations Act 2001(Cth) prescribes three alternatives for private companies to issue shares. These include the following:

  1. The person is listed as a shareholder of the company in the application for the registration of the company
  2. The company issues shares to the person
  3. The person buys shares in the company from an existing shareholder, and the company registers the transfer

By Registration of a company

A person becomes a shareholder (also known as a member pursuant to section 9 of the Corporations Act ) if they’re specified in the company registration form, pursuant to section 117(k) of the Corporations Act. In this case, the shares assigned to them will be issued to them when the company is registered

By Issuing

This involves the creation of new shares that are then granted to the proposed shareholder. Once the transaction is complete, the new shareholder should then be given a share certificate, which is a document that acts as legal proof of the shareholder’s ownership of the shares.

The issuing of new shares generally requires the approval of a company’s board of directors.  

By Transfer

Transferring company shares is where existing shares are granted to a proposed shareholder. The valuation of shares that are transferred is determined by their market value. Transferred shares must be issued a share certificate. This might seem like a relatively straightforward procedure at first, but there are several procedural requirements that must be met outlined in the Corporations Act

These requirements mainly relate to compliance with ASIC under the Corporations Act as well as company constitutions and shareholder agreements. Company constitutions and shareholder agreements are created by private companies, which can complicate matters. 

These constitutions and agreements may give rise to rights that are enforceable by existing shareholders that may entitle them to a priority purchase of the proposed shares or a right of refusal. Due to constitutions and agreements varying from company to company, there could be a potential failure to comply with ASIC, which may result in penalties. 

Compliance with ASIC

When distributing shares, companies have an obligation to update and inform ASIC on a variety of matters. Your company must maintain a share register that keeps a record of all the shares that you have distributed. This document must include details such as a shareholder’s:

  • Name
  • Address
  • The date on which their name was entered onto the register
  • Their class of shares
  • Which shares they hold

Additionally, you must inform ASIC every time your company has an issuing of shares. This must be done within 28 days after the shares have been issued. You must notify ASIC of these changes using their online change to company details form

ASIC will also require the following information when you submit your form:

  • The number of shares your company has issued
  • For each share, you must specify the class the share belongs to
  • How much of the share has been paid, or how much will be paid for each share
  • How much of each share has not been paid yet

There are many types of shares, including the following:

  • Preference shares 
  • Ordinary shares 
  • Redeemable preference shares
  • Special shares 
  • Employee’s shares

Failure to Comply

Failure to comply with ASIC may result in monetary penalties such as late fees. However, they can be waived on certain occasions.

Typically, ASIC  will first send a company a warning letter outlining the non-compliance. Failure to respond will warrant further warning notices. However, ASIC may also pursue court action or deregister the offending company.

Conclusion

Issuing shares in a private company can sometimes be complicated as you must ensure you’re aware of your rights, duties and obligations.

If you’re still unsure about how to issue shares in your private company, you should hire a lawyer for legal advice to make sure you’re legally compliant to avoid legal consequences.

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