Share capital

Corporate and Business Law (LW) · ACCA · 8 min read · Updated: 3 Nov 2026

Welcome! In this chapter, we are going to explore the backbone of company finance: Share Capital. Think of share capital as the "fuel" that helps a company engine run. When people invest money in a company, they receive "shares" in return, which represents their slice of ownership. Understanding this is crucial because it defines who owns the company, who gets the profits, and how the company is protected from going bust. Don't worry if some of the legal terms feel heavy—we’ll break them down together using simple everyday examples!

A share is a bundle of rights and obligations. When you buy a share, you aren't just giving money; you are entering into a contract with the company. A share is legally personal property, meaning you can sell it, transfer it, or leave it to someone in your will.

Nominal Value vs. Market Value

It is very important to distinguish between these two values:
1. Nominal Value (or Par Value): This is the fixed "face value" of the share set when the share is created (e.g., \$1.00). It stays the same regardless of how well the company is doing.
2. Market Value: This is what the share is actually worth when bought or sold. If the company is successful, a share with a \$1.00 nominal value might sell for \$50.00.

Different Types of Capital

In company law, capital is categorized into several distinct types:
- Authorised (or Nominal) Capital: The maximum amount of share capital that a company was historically authorized to issue under its constitution (where applicable).
- Issued (or Allotted) Capital: The nominal value of all shares that have actually been issued and allotted to shareholders. For example, if a company has issued 1,000 shares of \$1.00 each, the issued share capital is \$1,000.
- Called-Up Capital: The total amount of the issued capital that the company has requested shareholders to pay.
- Paid-Up Capital: The actual amount of money that shareholders have already paid to the company towards their called-up shares.
- Uncalled Capital: The portion of the nominal value of issued shares that has not yet been called upon by the company, representing an obligation on the shareholder to pay when requested.

2. Classes of Shares

Not all shares are created equal! Companies can create different "classes" of shares to suit different investors.

Ordinary Shares

These are the most common equity shares:
- Voting: Usually carry full voting rights (typically one vote per share).
- Dividends: Shareholders get paid only after any preference dividends have been satisfied. Dividend rates fluctuate with profits.
- Risk and Return: On liquidation, ordinary shareholders are repaid only after creditors and preference shareholders. They carry the greatest risk, but hold the ultimate right to residual surplus profits and assets.

Preference Shares

These are lower-risk shares that resemble a hybrid between debt and equity:
- Dividends: Usually carry a fixed percentage dividend (e.g., a 5% preference share).
- Priority: They receive their fixed dividend before ordinary shareholders receive anything, and usually enjoy priority repayment of capital on liquidation.
- Voting: Typically, preference shares carry no voting rights in general meetings unless their dividends are in arrears or a resolution affects their class rights directly.

Treasury Shares

Treasury shares are qualifying shares that a company has repurchased or bought back from its shareholders out of distributable profits and holds "in treasury" rather than cancelling them immediately.
- The company cannot exercise voting rights in respect of treasury shares.
- No dividends or other distributions can be paid on treasury shares.
- The company may subsequently hold, sell for cash, transfer for an employee share scheme, or cancel these shares without going through a full new allotment procedure.

3. Issuing Shares: Allotment, Rights Issues, and Bonus Issues

When a company issues new shares, this process is known as allotment. Allotment occurs when a person acquires the unconditional right to be included in the company's register of members.

Authority to Allot and Pre-emption Rights

Directors require proper authority (either in the articles of association or by shareholder resolution) to allot shares. In addition, existing shareholders are typically protected by statutory pre-emption rights: if a company proposes to allot new equity shares for cash, it must first offer them to existing shareholders in proportion to their current holdings to prevent involuntary dilution of their ownership and voting power.

Rights Issues vs. Bonus Issues

1. Rights Issue: An offer of new shares made to existing shareholders in proportion to their existing shareholding, typically at a discount to the current market price, enabling the company to raise fresh cash capital.
2. Bonus Issue (Capitalisation or Scrip Issue): An issue of fully paid additional shares to existing members for free, funded by converting the company's retained reserves (such as undistributed profits or the share premium account) into share capital. No new cash is raised.

Issuing Shares at a Premium

When shares are issued for a price higher than their nominal value (e.g., a \$1.00 nominal share is issued for \$3.00), the excess (\$2.00) is a share premium.
- The excess value must be transferred to a separate statutory reserve called the share premium account.
- Because the share premium represents capital paid by investors, it is subject to the strict rules of capital maintenance and cannot be distributed as cash dividends.
- The share premium account may strictly be used only for limited purposes, such as funding a fully paid bonus issue to members or writing off formation expenses and share issue costs where permitted.

Issuing Shares at a Discount

A company is strictly prohibited from issuing shares at a discount (i.e., for an issue price lower than their nominal value). If a \$1.00 share is issued for \$0.80, the allotment itself remains valid, but the allottee is legally liable to pay the company the remaining \$0.20 discount plus interest.

5. Variation of Class Rights

If a company wishes to alter, vary, or abrogate the specific rights attached to a particular class of shares (e.g., changing preference dividend entitlements or voting privileges), this constitutes a variation of class rights.

The company must comply with any procedure set out in its articles of association. Where the articles do not specify a procedure, statutory rules require:
- Written consent of the holders of at least 75% in nominal value of the issued shares of that class; OR
- A special resolution passed by a 75% majority at a separate general meeting of the holders of that class.

Protection for the Minority: To prevent abuse by the majority, holders of not less than 15% of the issued shares of the affected class (who did not consent to or vote in favour of the variation) have the statutory right to apply to the court to have the variation cancelled. If the court is satisfied that the variation unfairly prejudices the shareholders of that class, it will disallow the variation.

6. Capital Maintenance and Transfer of Shares

The doctrine of capital maintenance requires that a limited liability company must preserve its issued share capital as a permanent buffer fund for the protection of its creditors. Creditors cannot look to the personal wealth of shareholders to satisfy unpaid company debts; therefore, company law ensures that share capital is not returned to shareholders improperly.

Key applications of this principle include:
- Distributions and Dividends: Dividends must never be paid out of capital; they can only be lawfully declared and paid out of accumulated realised profits less accumulated realised losses (distributable reserves).
- Serious Loss of Capital: In public companies, if net assets drop to half or less of the called-up share capital, the directors are legally required to convene a general meeting to consider what steps must be taken to address the situation.

Transfer of Shares

Shares in a company are transferable in accordance with the company's articles:
- In public companies, shares are generally freely transferable on recognised financial exchanges.
- In private companies, the articles frequently grant directors the discretion to refuse the registration of a transfer (for instance, to keep ownership within a closed group), subject to providing formal notice and reasons within statutory deadlines.

Summary Quick-Check

1. Can a company issue a \$1.00 nominal share for \$0.85?
No. Issuing shares at a discount to nominal value is strictly prohibited; the shareholder must pay the shortfall plus interest.
2. Where must excess funds from shares issued above nominal value be credited?
To the share premium account, which forms part of capital and cannot be paid out as dividends.
3. What are treasury shares?
Shares repurchased by the company out of distributable profits and held by the company itself rather than being cancelled, carrying no voting rights or dividend rights while held.
4. What minority threshold can apply to the court to object to a variation of class rights?
Holders of at least 15% of the issued shares of that class who did not vote in favour.

References

ACCA LW-GLO Syllabus and Study Guide September 2026 to June 2027 — ACCA

Quick check

Can you answer these now?

Open each question to check the key ideas from this chapter.

What is the difference between nominal value and market value of a share?

Nominal (par) value is the fixed face value set when the share is created, whereas market value is the fluctuating price at which the share actually trades.

What are the key categories of share capital in company law?

The key categories are authorised, issued (allotted), called-up, paid-up, and uncalled capital.

What are the core characteristics of ordinary shares?

Ordinary shares usually carry full voting rights, fluctuating dividends paid after preference dividends, and residual claims on surplus assets upon liquidation.

What are the main characteristics of preference shares?

Preference shares typically carry a fixed dividend with priority over ordinary shares and priority on repayment of capital, but usually possess no voting rights.

What are treasury shares and what restrictions apply to them?

Treasury shares are repurchased shares held by the company rather than cancelled; they carry no voting rights and cannot receive dividends.

What are statutory pre-emption rights on the allotment of shares?

They require a company proposing to allot new equity shares for cash to offer them first to existing shareholders in proportion to their current holdings.

How does a rights issue differ from a bonus issue?

A rights issue raises new cash by offering discounted new shares to existing shareholders, whereas a bonus issue capitalises existing reserves to issue free shares without raising cash.

How must the proceeds from shares issued at a premium be treated?

The excess over nominal value must be credited to a non-distributable share premium account and cannot be paid out as cash dividends.

What is the legal consequence of issuing shares at a discount to their nominal value?

Issuing shares at a discount is strictly prohibited; the allotment remains valid, but the allottee must pay the company the shortfall plus interest.

How can class rights be varied in the absence of specific provisions in the articles?

By written consent of holders of at least 75% in nominal value of the issued shares of that class, or by a special resolution passed by a 75% majority at a separate meeting of that class.

What minority protection exists against an unfair variation of class rights?

Holders of at least 15% of the issued shares of the affected class who did not vote in favour may apply to court to have the variation cancelled.

What is the doctrine of capital maintenance?

It is the rule requiring a limited company to preserve its issued share capital as a permanent buffer fund to protect creditors from improper returns of capital.

What must public company directors do when the company suffers a serious loss of capital?

Directors must convene a general meeting to consider appropriate steps if net assets fall to half or less of the called-up share capital.

How do share transfer rules typically differ between public and private companies?

Shares in public companies are generally freely transferable, whereas private company articles often give directors discretion to refuse registration of a transfer.

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Introduction to Share Capital

1. What is a Share and Types of Capital?