EM Law | Commercial Lawyers in Central London
Equity Investment Solicitors
A company needs capital in order to fund start-up expenses, to expand and to grow. This capital can be raised through a number of methods. One of these methods is by equity investment. An equity investment is an investment by individuals or firms, which consists of buying stocks or shares in the company. For an investor, an equity investment is a medium to long-term strategy for maximising wealth. The investor will recover their money when they eventually sell their shares to others.
How is this done?
In order to raise equity investment, a company will usually create and issue new shares. Before doing this, you should check your company’s articles of association to see if there are any restrictions or procedural points that you will need to apply to the process. If your company has a shareholders agreement, this should also be checked. Unless you know what you are doing, it is usually a good idea to get an experienced professional to assist you with the process. Rectifying an issue with equity investments is likely to cost your company time and money if it goes wrong.
Check whether or not there is a cap in the Articles
One of the things you should check for in your articles of association is whether there is a cap on the number of shares that may be issued. If there is a cap then this may have to be removed. This can be done by passing a special resolution to alter the articles of association or by passing an ordinary resolution to increase the authorised share capital.
Check whether the company’s directors need authority to allot
Directors are responsible for the actual allotment of shares but they made need the authorisation of the shareholders to be able to make an allotment. However, there is an exception to this rule for private companies. Private companies with only one class of share have the power to allot shares of that class, unless they are prohibited from doing so in the company’s articles. This means that many smaller companies can bypass this requirement. If this exception does not apply, an ordinary resolution can be passed.
Check for pre-emptive rights
The next step is to check that the issue of shares complies with any pre-emption rights. A pre-emption right is the right for existing shareholders to have the first refusal on the issue of new shares by a company. Pre-emptive rights allow shareholders to have the chance to prevent the dilution of their shareholding if they have sufficient funds to subscribe for the new shares. If you find that there are any pre-emption rights, these can be disapplied. Pre-emption rights can be disapplied through passing a special resolution. Alternatively, the shareholders can waive their rights through a less formal procedure such as a waiver letter.
Shares can be allotted by the directors
Once the required resolutions have been passed, the board of directors can issue the new shares. This is usually done during a board meeting and will be documented in the board meeting minutes. Once new shares have been issued, there are various other registration and filing requirements to comply with. These include issuing share certificates to the new shareholder(s), filing a statement of capital with companies house and updating the company’s register of members.
Advantages and disadvantages of equity investments
Issuing new shares will dilute the shareholding of current shareholders. For shareholders, this effectively means that their ownership of the company is being cut down and can also mean loss of control over their business. For investors, investing in equity can be a risky move – company performance may not live up to expectations and if the business fails it will be difficult for the investor to recover anything.