How To Issue Shares For Your Private Company
Want to issue shares for your company? Here's everything you need to know.
A Private company (also known as a Proprietary company) can create and issue shares, despite not being listed on the Australian Securities Exchange (ASX). However, they are limited by the number of shareholders they can have and how they can distribute these shares.
A Proprietary company is limited to having 50 shareholders who are not employees of the company. It’s important to note that employees with shares or shareholders connected with crowd source funding (CSF) offers do not contribute to this number.
Further, it must be recognised that Proprietary companies are not 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.
How to Give Shares
A Proprietary company is not able to utilise the ASX as a platform to sell their shares. However, the Corporations Act 2001 prescribes three alternatives being:
- The person being listed as a shareholder of the company in the application for the registration of the company.
- The company issues shares to the person.
- The person buys shares in the company from an existing shareholder and the company registers the transfer.
A person becomes a shareholder (referred to as a member in legislation) if they a specified in the registration form, pursuant to s117(k). In which case the shares allotted to them will be issued to them on the registration of the company.
This involves the creation of new shares that are then granted to the proposed shareholder. Once the transaction is complete the 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.
Transferring shares is where existing shares are granted to a proposed shareholder. They should then be issued a share certificate. While at first this seems like a relatively easy process, there are several procedural requirements as stipulated by law, which mainly concerns compliance with ASIC under the Corporations Act as well as Company Constitutions and Shareholder Agreements, which are created by the Proprietary company itself, and may 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. As these constitutions and agreements vary company by company, and failure to comply with ASIC may result in penalties it is important to seek legal advice concerning your rights, duties and obligations when entering into these transactions.
Compliance with ASIC
When distributing shares, companies have an obligation to update and inform ASIC on a variety of issues. Your company will maintain a share register that keeps a record of all the shares that you have distributed. This document must include details such as the shareholders names, addresses, date, shares, class of shares amongst other things.
Additionally, you must inform ASIC if there have been any changes. You can notify ASIC by lodging an online form.
Failure to Comply
Failure to comply with ASIC may incur monetary penalties such as late fees. However, they can be waived on some 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.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
Chris is the Partnerships Manager at Lawpath. He holds a Bachelor of Business and Bachelor of Laws from the University of Technology Sydney. He is interested in how technology can influence the future of the legal industry.